Lenders like to attach extra benefits on home loans to lure you in. This is usually what differentiates the range of products on offer with the same lender - you pay more for features like offset accounts or waived credit card fees.
However, the products with all the extras usually also come with higher interest rates or extra fees. Have a look at any lender that offers home loans either with or without an offset account for example - the majority of the time the comparison rate will be significantly higher on the option with the offset.
If you aren't fussed about these frills and just want a no-nonsense, meat-and-potatoes mortgage, you'd probably be happy with a basic home loan.
What is a basic home loan?
A basic home loan is typically a low-interest, low fee variable-rate loan that doesn't come with an offset account. It is often a bank or lender's cheapest home loan offer.
For example, at the time of writing Macquarie Bank currently offers two variable rate home loans - a 'Basic home loan' and an 'Offset home loan'. The 'Basic home loan' doesn't include an offset account, but the comparison rate is more than 20 basis points (0.20%) lower than the 'Offset home loan'.
Home loan basics
Basic home loans are pretty easy to understand. You are approved for a loan up to a certain amount, then repay the principal amount plus interest according to your repayment schedule. The property you buy is used as security, which means if you can't pay back the loan, your lender repossesses the property. As you pay off the loan, you own more and more of your home outright until eventually the loan is paid off.
There isn't a whole lot more to it, so if finance makes your head hurt, a basic home loan might be your least painful route to buying your first property.
There are still some extra features that you might find on a basic home loan though. Most basic home loans will come with a redraw facility, which is similar to an offset account.
Who offers basic home loans?
Pretty much all major and not-so-major lenders offer at least one basic home loan. This includes each of the big four banks (ANZ, Commonwealth Bank, NAB and Westpac), the larger retail banks (ING, Macquarie, Suncorp, AMP, BOQ and more), customer-owned banks (like Greater Bank, Newcastle Permanent, Heritage Bank) as well as non-bank lenders like loans.com.au.
There's still plenty of competition between lenders when it comes to basic home loans, so make sure you compare a good number of them before deciding to apply.
Buying a home or looking to refinance? The table below features a selection of home loans on the market with competitive variable interest rates for owner-occupiers.
| Lender | Home Loan | Interest Rate | Comparison Rate* | Monthly Repayment | Repayment type | Rate Type | Offset | Redraw | Ongoing Fees | Upfront Fees | LVR | Lump Sum Repayment | Additional Repayments | Split Loan Option | Tags | Features | Link | Compare |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
6.04% p.a. | 6.06% p.a. | $2,408 | Principal & Interest | Variable | $0 | $530 | 90% | Featured 4.6 Star Customer Ratings |
| |||||||||
5.99% p.a. | 5.90% p.a. | $2,396 | Principal & Interest | Variable | $0 | $0 | 80% | Featured Apply In Minutes |
| |||||||||
6.09% p.a. | 6.11% p.a. | $2,421 | Principal & Interest | Variable | $0 | $250 | 60% | Featured Unlimited Redraws |
|
Basic home loan features
Despite being 'no-frills' and not having the most in-demand add-ons like an offset account, basic loans aren't entirely featureless. It depends on the lender.
These are some home loan features that you'll often find on basic home loans:
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Redraw facilities, allowing you to redraw extra repayments you've made (although they might charge a fee for access or set limits on the number of redraws allowed).
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The option of making extra or more frequent payments, which allows you to adjust your repayment schedule to your needs and pay off your home loan faster. These may also be limited.
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A 'top-up' feature, which lets you increase your original mortgage amount if you need to borrow for something else like a car, or to spread out your repayments more.
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Lump-sum payments, which let you deposit a larger chunk of money into your home loan, instead of making consistent, ongoing extra repayments.
Basic home loan interest rates
Most lenders that offer multiple home loan products usually reserve the lowest rates and fees for the loan with the least features - which is often advertised as the 'basic' option.
Compared to home loans with offset accounts, the comparison rates on basic home loans are often 10-50 basis points (0.10-0.40%) lower.
How do you apply for a basic home loan?
Applying for a basic home loan is really no different from the usual home loan application process in that you typically follow these steps:
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Gather your required documents, including your ID (driver's license, passport etc.), income verification, lists of assets and liabilities and any current mortgage documents you have.
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You submit your application to the lender, with your required ID, documents and property details. This can be done online, over the phone or in person.
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A preliminary assessment is conducted by the lender.
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The lender completes a property valuation, to determine the correct market value of the home. There may or may not be a fee for this.
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The lender approves or rejects the loan, and sends you an offer if they approve you.
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The loan is settled and the funds are advanced to you.
You should also consult our articles on 9 ways to boost your chances of home loan approval and some of the common and not-so-common ways your application could be rejected.
Are basic home loans worth it?
Basic home loans may or may not be the best choice for you. It's important you get your head around exactly what you're saving by choosing a basic option, as well as what you're sacrificing.
Basic home loan benefits
The biggest benefit of a 'no frills' home loan is usually lower interest rates, not to mention lower ongoing fees. Even small differences in rates can make a massive difference over the life term of a loan. Over a 30 year loan at $500,000, you would likely save about $55,740 by dropping your loan rate from 5.50% p.a to 5.00% p.a. (estimated using the Savings.com.au Home Loan Comparison calculator).
Basic home loans also often aren't featureless - you still might be able to make overpayments or even redraw excess funds.
Basic home loan drawbacks
By choosing a basic home loan, you'll need to appreciate that you are missing out on the potential benefits of extra features. After all, there has to be a reason why some voluntarily choose those options with higher rates. Features like offset accounts can be a huge source of savings over the loan term if you can build a significant balance, which can negate the benefits of lower rates.
Who are basic home loans for?
Basic home loans suit some borrowers more than others.
These are some examples of scenarios where 'no frills' home loans are often the better option:
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If you're borrowing a smaller amount: People borrowing larger amounts may want to consider getting a different kind of loan, as some bigger loans (like $750,000, $1 million etc.) can offer discounts to borrowers for paying more. People with smaller amounts, on the other hand, could be well suited to one of these cheap loans.
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You won't be able to take advantage of extra features: Offset accounts can be huge, but only if you have the extra capital to build up a big balance. If you don't expect you'll have much disposable income available to put into your offset, you might be better off choosing a basic home loan
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You don't want to be tied down: Fancier home loans, especially loans with fixed rates or packaged products, can tie you down and make it harder to switch away. Basic home loans won't give you this problem, which is especially important as the ACCC recently said switching loans could save you around $17,000 in interest.
These aren't hard and fast rules. You might be in a situation like the above and your best choice still ends up being a home loan with extra features, so you should still make sure you're considering all your options.
Savings.com.au's two cents
If a basic home loan sounds good to you, then you should compare a wide range of them. That means looking at interest rates, fees, the features that are there, and any other hidden surprises that might be buried in the T's and C's. For example, the low interest rate you've found might be a temporary introductory rate, reverting to something less appealing after a couple of years.
You should also make sure the rates and fees being offered are more competitive than a non-basic loan.
And remember, just because your basic home loan has a cheaper interest rate now, doesn't mean it always will. Mortgage rates are changing all the time, so you should always be on the hunt for a better offer.
Photo by Bench Accounting on Unsplash
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