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Commonwealth Bank's fee-free but not the cheapest mortgage

March 25, 2011

Competition between the major banks escalated this month when the Commonwealth Bank (CBA) unveiled its new No-Fee Home Loan. But how does it stack up when compared with some of the top mortgages monitored by RateCity and does a fee-free option always equal a cheaper home loan?

Borrowers who opt for the CBA's No-Fee Home Loan can save $150 on settlement fees and up to $350 each year compared with other CBA home loans, which equates to almost $9000 over a 25-year term. It compares favourably on fees to the other bank's home loans too, including the other majors.

Compared with one of the cheapest variable home loans on RateCity, Collins Home Loans Variable at 6.72 percent, the CBA No-Fee Home Loan will save you about $9500 over the course of 25 years in establishment, ongoing and discharge fees.

Like many mortgages, the Collins Home Loans Variable has upfront fees of $875, an ongoing annual fee of $345 and a discharge fee of $600 if you switch loans.

But here's how to save tens of thousands
With an interest rate of 7.24 percent, the CBA's No-Fee Home Loan does not rate among the 150 cheapest variable rate home loans on RateCity, coming in at 156th position. And a low-interest mortgage can mean thousands of dollars saved over the life of your loan.

For instance, if you chose the Collins Home Loan Variable for a $300,000 mortgage, you'd be around $20,300 better off over the life of the loan than if you chose the CBA option.

CBA has three other variable rate home loans that have cheaper interest rates than the No-Fee Home Loan, such as the Wealth Package variable for balances between $250,000 and $500,000 at 7.11 percent.

Despite having upfront fees of $150 and annual ongoing fees of $350, you would still be $1385 better off with the Wealth Package. Although it must be bundled with a CBA transaction account or credit card and carries a number of conditions.

Will all banks follow suit?
The CBA's move to slash fees is likely to spell change to fees across the board, at least among the big four, which is great news for borrowers.

Of the 1070 mortgages monitored by RateCity (excluding the major four banks), only 36 percent have ongoing fees, so there are 685 other fee-free residential home loans on the site. Of the remainder that do hit borrowers with fees, the average annual ongoing fee charged is $210.

It's easy to be fooled into thinking that your fee-free mortgage is the best on the market, because of well-marketed savings. But it's important to always remember that an ongoing interest rate can be a more important factor in the real cost of your loan over time.

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