As the name would suggest, basic variable loans are the no-frills loans aimed at borrowers who are determined to keep fees and interest rate 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-5% rates, which are practically non-existent on standard variable mortgages these days.
However, unlike their standard variable counterparts, basic variable loans lack basic functionality – sometimes including the ability to make extra repayments.
Moreover, basic variable loans rarely include redraw facilities, offset accounts or the all-in-one facility, and as such are not suited to people who wish to temporarily park their savings into their home loan accounts to save on interest.
However, if yo're looking for a cheap loan and won't need all the other bells and whistles, then basic variable could be an economical way to pay for your property purchase.
And the winner is…
Reduce Home Loans Basic Variable loans emerged as the cheapest basic variable loan in the non-bank category, thanks to its ultra-low interest rate.
With a headline rate of just 4.79%, Reduce Home Loans Basic Variable loan carries the lowest rate among the topranking basic variable rate products in this month's competition. The product will cost you the least over three years compared to the average cost of the average loan in our books.
Over a three-year period, customers are poised to save $6,224 compared to the average loan in our database. The longer you hold, the bigger the potential savings would be. Over five years you could save $8,005, and $13,770 over 10 years.
ING Direct's Mortgage Simplifier for loans greater than $300,000 took the top spot for the best value basic variable loan in the bank category with interest rate of just 5.28% – the lowest among bank products.
ING Direct's product has no ongoing fee and has an exit fee of $600 if you pay off your loan within four years. Over three years, the ING Direct product could save you $1,567 compared to the average cost of the loan in Your Mortgage database. Over five years the saving goes up to $2,399, and $5,075 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 the bare-boned, cheap-aschips mortgage, there is more emphasis on slashing fees and charges than offering flexibility and personalising the loan to the borrower.
As such, winners in this category emerged because they offer the lowest rates around. Keeping fees and charges to a minimum also helped the winning loans secure their positions, with none of the top bank products charging ongoing account-keeping fees.
Another aspect that differentiated Reduce Home Loans from the pack was the deferred establishment fee. Reduce Home Loans does not charge this usually hefty fee if the loan is paid up after three years. In contrast, all the bank products carry between $300 and $1,050 fee if you exit within four years.
What about features?
A complaint by many borrowers of basic variable loans is that while rates and other fees and charges are incredibly low, the loans do not provide sufficient flexibility.
The majority of these loans do not allow borrowers flexibility in terms of varying repayment size by using features such as early repayment, redraw or offset.
However, the winning products – the ING Mortgage Simplifier and Reduce Home Loan Basic Variable loans – offer more than just a low rate. Borrowers can make unlimited extra regular repayments or a lump-sum repayment at any time. These funds can be accessed via interest and phone banking with no minimum withdrawal amount. These loans can be transferred to another property and it can be combined with a fixed rate loan.
How the loans were compared
The team at Your Mortgage has worked out the 'true cost' of all 19 basic variable rate products from banks and 27 products from the non-bank lenders in our books by taking into account each and every fee, including upfront, ongoing and deferred establishment fees as of 16 October 2009.
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 or calculation on a loan amount of $300,000 at 80% LVR taken over 30 years.
The 'Overall winner' is the product that offers the highest average savings over three, five, and 10 years compared with the average loan in our database.
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