editor's choice: Basic variable loan

By Your Mortgage

As the name suggests, basic variable loans are the no-frills, 'cheap as chips' loans aimed at borrowers determined to keep fees and charges to a minimum.

Basic variable products are a handy option for those with an established mortgage who believe they are paying too high a rate and are considering refinancing. Investors are also taking out these loans in growing numbers to take advantage of sub-7% rates, which are practically non-existent on standard variable mortgages these days.

However, unlike their standard variable counterparts, basic variable loans are by no means full-feature products, and lack basic functionality, sometimes including the ability to make extra repayments.

Moreover, basic variable loans rarely include redraw facilities, offset accounts or all-in-one functionality, and as such are not suited to people who want to park their savings temporarily in their home loan accounts to save on interest.

However, if you're just looking for a cheap loan and won’t need all the bells and whistles, basic variable could be an economical way to pay for your property purchase.

And the winner is…
The claim "home loans with the lowest rates in Australia" can be substantiated it seems, with Wizard Home Loans' multi-award-winning product, the Rate Breaker loan, emerging as Australia’s best value basic variable loan in the non-bank category.

With a headline rate of 6.33%, the Rate Breaker carries the lowest rate among the top-ranking basic variable rate products in this month’s competition. The product will cost you the least over three years compared to the average basic variable loan in our books,notwithstanding a deferred establishment fee of $2,150, which would apply if you chose to refinance at that time.

Over a three-year period, customers are poised to save $5,153 compared to the cost of the average basic variable loan in our database. And the longeryou hold the loan, the bigger the potential savings would be. In addition, over five years, you could save $10,967, or $22,284 over 10 years.

The St.George Negotiated Basic Home Loan topped the bank category with a headline rate of just 7.02% – the lowest among bank products. St.George’s product carries the lowest fees with a total upfront cost of just $100, no ongoing fees and just $350 in exit costs.

Over a three-year period, the St.George product could save you $2,896 compared to the average cost of a basic variable loan in the Your Mortgage database. And, over a five-year period the savings increase to $3,379, and to $6,351 over 10 years.

A closer look
In basic variable mortgage lending,the race is on to provide the cheapest home loan around. Aimed at 'rate shoppers' looking for a bare-bones mortgage, there is more emphasis on slashing fees and charges than offering flexibility and personalising the loan to the borrower.

As such, the winners in this category emerged because they offered the lowest rates around. Keeping fees and charges to a minimum also helped the winning loans secure their positions, with none of the top four loans charging ongoing account keeping fees.

Another aspect that differentiated St.George from the pack was the deferred establishment fee. The bank managed to keep this at $350, which is one of the lowest among bank products. In contrast, Wizard has the highest deferred establishment fee of all the products compared in the non-bank category, at $2,150. However, its ultra-low interest rate and competitive upfront fees ensure that borrowers will save the most with this product.

What about features?
One complaint many borrowers have about basic variable loans is that while rates and other fees and charges are incredibly low, the loans do not provide sufficient flexibility. Most of these loans do not allow borrowers flexibility in terms of varying repayment size by using features such as early repayment, redraw or offset.

Wizard's Rate Breaker loan is a classic example of a low interest rate loan that carries none of the product features commonly found in more flexible products.

Paying more than your monthly balance is a great way to get your loan size down and save on interest, so these basic variable loans may not be as attractive to certain borrowers, particularly those with irregular or lumpy incomes. Furthermore, some basic variable providers do not permit borrowers to fix portions of their mortgages. Check with your lender though, as some providers do allow you to fix.

How the loans were compared
The team at Your Mortgage has worked out the 'true cost' of all 17 basic variable rate products from banks and all 22 products from the non-bank lenders on our books by taking into account each and every fee, including upfront, ongoing and deferred establishment fees, as at 19 November 2008.

By working out how much a given loan will cost you after a range of time periods – three, five and 10 years – we show you the impact that these fees can have on the total cost of your mortgage. By adding all fees to the cost of principal and interest (P&I), we calculate the true cost of a mortgage over three, five and 10 years. This month, we based our calculation on a loan amount of $300,000 at 80% LVR taken over 30 years.

The accolade of 'overall winner' is assigned to the product that offers the highest average savings over three, five and 10 years, as compared to the average basic variable loan in our database.