What is a basic home loan?

author-avatar By on December 18, 2020
What is a basic home loan?

Home loans seem to be getting fancier by the day, but not everyone wants a home loan with more inclusions than inspector gadget.

Modern-day home loan features can include anything from the common offset account and redraw facility, to loan splitting and lines of credit, to more advanced features like personalised banking services and even 100% online account management.

Sometimes though, you might just want milk that tastes like real milk a home loan that acts like a real home loan. If that’s you, you might be suited to a basic home loan, which along with being easier to manage, could well be cheaper too.

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.

Base criteria of: a $400,000 loan amount, variable, fixed, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. If products listed have an LVR <80%, they will be clearly identified in the product name along with the specific LVR. The product and rate must be clearly published on the Product Provider’s web site. Monthly repayments were calculated based on the selected products’ advertised rates, applied to a $400,000 loan with a 30-year loan term.

On this page:

What is a basic home loan?

A basic home loan is a type of mortgage that tends to come with lower fees (ongoing and at application) as well as a lower ongoing interest rate, in exchange for not having some of the more attractive features seen in other home loans. For example, a basic home loan could have a discount of 20 basis points (0.20% p.a) on its interest rate, but it might not come with an offset account - which can be a deal-breaker for some because offset accounts can be very handy.

Many basic home loans do however come with redraw facilities, which can act like an offset account but have a few key differences.

Basic home loan interest rates

How low are the interest rates on these loans? At the time of writing,  the big four have ongoing basic home loan interest rates of between 2.19% and 2.72%. Their standard variable rate loans, on the other hand, all have interest rates in excess of 3.00% p.a. A similar trend applies among smaller lenders: Reduce Home Loans, for example, has a basic home loan at 1.77% p.a (1.83% p.a. comparison rate*), but its discounted variable rate loan (for owner-occupiers paying principal and interest) is higher than the 2.00% p.a mark.

While these are just a few examples, there can be some serious discounts to be found by choosing a basic home loan. Based on broader research by Savings.com.au, the average basic home loan interest rate for a variable home loan is around 3.30% p.a, whereas standard variable home loans are closer to 3.50% p.a on average.

How are basic home loans different?

There isn’t really much more to them than that. They’re a simple, no-frills loan that trade-off features in exchange for cheap rates and fees compared to a standard variable loan.

Basic home loans usually have variable interest rates, but can be used by both investors as well as owner-occupiers, and can have principal and interest repayments or interest-only repayments. You can also refinance to a basic loan, and depending on the lender, secure the loan with the help of a guarantor.

Other types of home loans different to basic home loans include:

  • Low-doc home loans, low documentation home loans available to those that don’t have the correct proof of income documents available

  • Reverse mortgages, which allow people who are asset-rich but cash-poor (and usually over 60) to access the equity in their home

  • Construction loans, a mortgage you take out when you are either building a new home or you are doing a major renovation

  • Bridging loans, which are meant to help when you’re in the period between selling your old home and buying a new one

  • Line of credit home loans, a sort of ‘credit limit’ where you can swap the equity you’ve built up in your home for cash, up to a certain amount

  • Package home loans, which are home loans that let you bundle a number of your everyday financial needs into a single product (like credit cards, insurances etc.)

Read more in What are the different types of home loans?

What features can basic loans come with?

Despite being ‘no-frills’ and not having the most in-demand add-ons like an offset account, basic loans aren’t entirely featureless. That will depend on the lender. Many basic home loans will still include some basic home loan features and add-ons, like:

  • 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)

  • 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.

  • A ‘top-up’ feature, which lets you increase your original mortgage amount if you need to borrow for something else like a car, or if you need to spread out your repayments more. According to Savings.com.au’s research, the vast majority (more than 90%) of basic loans still offer this feature.

  • Lump-sum payments, which let you deposit a larger chunk of money into your home loan, instead of making consistent, ongoing extra repayments.

  • Different repayment options, like interest-only, fixed and variable, turning your loan into a construction loan and more.

And of course, lower interest rates and fees which are usually well below what’s offered on standard variable loans.

Who are basic home loans for?

Most borrowers can apply for a basic home loan, but that doesn’t mean they’re suitable for everyone. The type of people who are generally best suited to a basic home loan may include:

  • People borrowing small amounts: 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.

  • People who just want a home loan and nothing more: Features are nice, but not everyone can be bothered with them. If you just want a mortgage, and don’t really care that much about offset accounts or redraws, then a basic no-frills loan could be right up your alley.

  • People who don’t want to be tied down to any bank: 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.

That being said, these loans might come with lower rates and fees, but by lacking the extra bells and whistles that can benefit other mortgage holders, better offers could be out there.

Pros and cons of basic home loans

As with most loans, basic home loans have advantages and disadvantages.

Pros of basic home loans:

  • Often cheaper interest rates compared to standard home loans

  • Often lower annual and ongoing fees

  • They may still have some features attached, like redraw facilities (although they may charge fees)

  • They may still allow you to make extra repayments if necessary

  • They can cater for most types of borrowers (refinancers, investors, first home buyers etc)

  • They’re often simple to apply for, and convenient for people borrowing smaller amounts

Cons of basic home loans:

  • They may lack many of the better features that are popular with homeowners, like an offset account

  • This lack of features could actually negate the lower interest rate, as these features can help save the homeowner money (this will depend as well on the interest rate)

  • The features they do typically have (like redraw facilities, extra repayments) are often restricted by limits and fees.

  • They may not be suitable for people borrowing larger amounts, as some bigger loans can offer discounts to borrowers.

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 online lenders like ME Bank and 86 400.

There’s still plenty of competition between lenders when it comes to basic home loans, so make sure you properly compare a good number of them before deciding to apply.

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:

  1. 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.

  2. 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.

  3. A preliminary assessment is conducted by the lender.

  4. 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.

  5. The lender approves or rejects the loan, and sends you an offer if they approve you.

  6. The loan is settled and the funds are advanced to you.

You should make sure you compare home loans first before applying, both basic loans and other types of loans to see which is best for you. We’ll explore how you can do this below.

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.

Savings.com.au’s two cents

If a basic home loan sounds like your thing, then you should compare a wide range of them, looking at interest rates, fees, the features they still have, and any other hidden surprises that might be buried in the T’s and C’s. They might, for example, only be offering a temporarily low interest rate, before reverting to a much higher one.

You should also make sure the rates and fees being offered are also 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, and in an ultra-low rate environment, you should always be keeping your eyes, ears and fingertips peeled for a better offer. This is particularly true if you’ve been with the same lender for a few years. Not only could your home loan needs change, but you could end up getting stung with a loyalty tax, which you could avoid by refinancing.


Photo by Bench Accounting on Unsplash

Disclaimers

The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered which includes retail products from at least the big four banks, the top 10 customer-owned institutions and Australia’s larger non-banks:

  • The big four banks are: ANZ, CBA, NAB and Westpac
  • The top 10 customer-owned Institutions are the ten largest mutual banks, credit unions and building societies in Australia, ranked by assets under management in November 2020. They are (in descending order): Credit Union Australia, Newcastle Permanent, Heritage Bank, Peoples’ Choice Credit Union, Teachers Mutual Bank, Greater Bank, IMB Bank, Beyond Bank, Bank Australia and P&N Bank.
  • The larger non-bank lenders are those who (in 2020) has more than $9 billion in Australian funded loans and advances. These groups are: Resimac, Pepper, Liberty and Firstmac.
  • If you click on a product link and you are referred to a Product or Service Provider’s web page, it is highly likely that a commercial relationship exists between that Product or Service Provider and Savings.com.au

Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site.

In the interests of full disclosure, Savings.com.au, Performance Drive and Loans.com.au are part of the Firstmac Group. To read about how Savings.com.au manages potential conflicts of interest, along with how we get paid, please click through onto the web site links.

*Comparison rate is based on a loan of $150,000 over a term of 25 years. Please note the comparison rate only applies to the examples given. Different loan amounts and terms will result in different comparison rates. Costs such as redraw fees and costs savings, such as fee waivers, are not included in the comparison rate but may influence the cost of the loan.

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William Jolly joined Savings.com.au as a Financial Journalist in 2018, after spending two years at financial research firm Canstar. In William's articles, you're likely to find complex financial topics and products broken down into everyday language. He is deeply passionate about improving the financial literacy of Australians and providing them with resources on how to save money in their everyday lives.

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