Basic vs Package Home Loans

Key takeaways

• The package fee is charged every year for the life of the loan.
• The break-even is loan size dependent - larger loans favour the package.
• Only count bundled benefits you would actually have paid for.
• Basic loans have improved - some now include an offset without a package fee.

What is in a package?

Packages vary by lender but the components are consistent: a discount off the standard variable rate, an offset transaction account with fees waived, waived or reduced application and valuation fees, a credit card with the annual fee waived, and sometimes discounts on general insurance.

The discount is the substantial part. The rest is a collection of small waivers that only have value if you would otherwise have paid for those things.

The fee is annual and continues for as long as the package does, which over a 25 or 30 year loan is a meaningful cumulative amount.

How do you work out the break-even?

The comparison is: (basic loan rate - package rate) x loan balance, versus the annual package fee. Illustrative, at an assumed discount of 0.15 percentage points and a $395 annual fee:

Substitute the actual discount and fee you are offered - both vary considerably by lender and by how hard you negotiate. Two adjustments matter: the balance falls over time, so the discount value falls with it, while the fee does not; and if you would have paid a credit card annual fee anyway, add that to the package side.

When does a basic loan win?

Several situations, and they are more common than package marketing suggests.

• Small or rapidly reducing balances - the discount shrinks with the balance while the fee does not.
• You will not use the extras - no credit card, no need for multiple offsets, no insurance through the lender.
• The basic product already has an offset - several lenders now include one without a package.
• The advertised basic rate is simply lower even after the package discount. This happens, particularly with online-focused products.

Compare the actual rate offered on each, not the package discount as a concept. A 0.15 point discount off a higher standard variable rate can still land above a competitor's basic rate.

Frequently asked questions

How much is a home loan package fee?

Commonly a few hundred dollars a year, charged annually for the life of the loan. The exact amount varies by lender, and it is sometimes negotiable as part of the overall deal.

Is a package loan worth it on a small loan?

Often not. The discount is a percentage of the balance while the fee is fixed, so smaller loans have less discount to offset the fee. Run the break-even with the actual discount and fee you are offered.

Can I get an offset without paying a package fee?

Yes - a number of lenders now include an offset account on basic or online products without a package fee. This has changed materially in recent years, so do not assume an offset requires a package.

Can I negotiate the package fee?

Sometimes, particularly on larger loans or when refinancing. The rate discount is usually more negotiable than the fee, so focus there first.

Related reading

• Comparison Rate: What It Includes and What It Hides
• Offset Account vs Redraw: The Real Difference
• Split Loans: How Much Should You Fix?

Sources

• Moneysmart - home loan fees — ASIC
• Home loan pricing and comparison rates guidance — ASIC