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Based on their advertised rates, Packaged Home Loans may appear to offer more value than their non-packaged counterparts. But this may not be the case. Here's a look at what you need to look at while considering a packaged loan
With interest rates touching record lows, borrowers are spoilt for choice with some very competitively priced home loans. A good percentage of these loans are 'Packaged Deals'. While Packaged Home Loans do offer some convenience, they are not suitable for all borrowers. Here's a look at what you need to consider before opting for one.
What is a Packaged Home Loan?
A packaged home loan is nothing but a mortgage that is bundled with everyday financial products like a credit card, insurance, and loan features like an offset account and redraw facility, among other offerings. Packaged loans made an entry into the mortgage market in the early 1990s and were initially targeted at high-income professionals. Gradually over time, they became a sales tool to attract more customers. The most significant benefit that a packaged loan offers is the convenience of consolidating multiple financial needs into one single product. So why is there a caveat associated with them? This is because 'Packaged Loans' claim to offer better value than standard no-frill home loans. This, however, may not always be the case. There are three essential aspects borrowers should consider before securing a packaged loan.
1) Comparison Rate and Hidden Fees
Most Packaged loans use a very competitively priced home loan rate to attract customers. But a closer look at their advertised rate and their actual comparison rate may reveal that they are more expensive than non-packaged loans. We at Yellow Brick Road, researched how the lending rates between the flagship packaged loans and basic loans compare. Here are our findings:
- For major banks, on average, their basic loan rate is 0.82% cheaper than their packaged loan rate for the same borrower. (we looked at the pricing for an 80% LVR Owner-occupied, P&I loan from their websites on 15/2/2021)
- Additionally, most packaged loans have a yearly administrative fee of about $400 or about 0.10% of the loan, which significantly eats into the benefits of a low home loan rate.
- While the home loan offering of a packaged Loan may be lower than industry rates, this may not be the case for bundled offerings like insurance and credit card.
In a nutshell, except for a competitively priced home loan, the high prices of bundled offerings and the add on administrative fee of a packaged loan may make it a lot more expensive.
2) Bundled Offerings
A lot of bundled offerings may not be relevant for every borrower. For instance, you may already have income protection insurance through your superannuation fund or may not really need an additional credit card. Often, borrowers swayed by the advertised low rates of a packaged loan end up paying for bundled offerings they are unlikely to use.
Tying all your banking needs with one single offering may make moving hard. Additionally, a mortgage is a long-term commitment. During your loan, you may no longer need some of the bundled offerings or may find them lacking in quality or service. Discontinuing the use and payment for any of the add on products may become challenging.
While Packaged loans are not unsuitable for all borrowers, they do have several constraints. It is best to rely on a mortgage broker's professional guidance. A broker will not only scope the market for you but also handle all loan paperwork should you choose to apply for a loan.
Reach us for the best way forward as per your circumstances.
The information is a compilation from various sources for your benefit and should not be relied upon in lieu of appropriate professional advice.