Bendigo Bank extends offset accounts to fixed rate mortgage holders

Bendigo Bank extends offset accounts to fixed rate mortgage holders

The home loan war is taking a new direction, as one of Australia’s biggest lenders, Bendigo Bank, offers fixed rate mortgage borrowers the option to access a 100 per cent offset account.

Bendigo Bank will open the offset account option on its Complete Home Loan packages to owner-occupiers and investors.

  • An offset account is a bank account that is attached to a home loan. Funds in an offset account can “offset” the loan balance on a mortgage when the lender charges a borrower interest.

However, the offset account will come with a price. The interest rates on Bendigo’s home loans with offset accounts are five basis points higher than its lowest fixed rates and come with a monthly fee of $15.

Offset accounts are generally more common with variable rate home loans than fixed rate home loans. As few as nine lenders on the RateCity database have fixed rate mortgages that come with an offset account.

ANZ is the only big four bank that has an offset account with its fixed rate mortgage, but it is only available with the one-year fixed-rate option.

Other smaller lenders with this offering include Mortgage House, Teachers Mutual and Well Home Loans.

How much you could save with an offset account

Using an offset account may save borrowers tens of thousands of dollars in the long run. RateCity analysis shows by holding $50,000 in a linked offset account, a mortgage holder with a $500,000 balance on a 3.42 per cent rate over 30 years may save more than $78,000 in interest costs. The potential savings average out to be thousands of dollars a year.

They may also pay off their mortgage sooner, potentially shortening their loan term by nearly five years.

Interest savings over loan term

$78,342

Time saved paying off the mortgage

4 years and 9 months

Source: RateCity

Notes: Based on a $500,000 principal-and-interest mortgage on the average rate of 3.42 per cent over 30 years. Calculations assume that the offset account balance doesn’t change month to month, and that the interest rate remains the same during the life of the loan.

Why you might want an offset account

RateCity.com.au research director Sally Tindall said the new offset option could appeal to mortgage holders who may have been hesitant to fix their interest rate due to a lack of flexibility.

“The lack of an offset account can sometimes be a deal breaker for people thinking about fixing their rate,” she said.

“Offset accounts on fixed-rate mortgages offer flexibility to households who want the benefit of record-low fixed rates, and the ability to reduce their interest bill with any spare money.”

Bendigo Bank consumer banking executive Richard Fennell said the bank’s Complete Home Loans also come with online redraw facilities, flexible repayments, and full offset on up to six accounts – features that don’t always come with fixed rate mortgages.

“Traditionally, while fixed loans provide the certainty of repayments for the life of the loan, no matter the interest rate environment, they have limitations in redraw and repayment options, and don’t assist you in reducing interest through offset functionality,” he said.

The home loan rate war rages

The move by Bendigo is an indicator that the home loan war is branching out beyond interest rates to mortgage features offering flexibility.

“This move will help Bendigo Bank stand out in what is a very competitive home loan market,” Ms Tindall said.

“An offset account on a low fixed rate may be especially appealing to investors who want to avoid using their redraw for tax purposes.”

Fixed rate home loans: What the major banks offer

Bank 100% offset Extra repayment cap
CBA No $10,000 a year
Westpac No $30,000 in the fixed rate period
NAB No $20,000 in the fixed rate period
ANZ Yes (1-year only) 5% of balance or $5,000 a year
ING No $10,000 a year
Macquarie Bank No $10,000 a year*
Bendigo Bank Yes 20% of balance in fixed rate period

Source: RateCity.com.au. Note: Some Macquarie customers have an extra repayment limit of 5% of the initial fixed amount a year.

Things to think about when fixing a home loan rate

  • Do you need an offset account? Most fixed rates don’t come with an offset account.
  • Are you likely to make extra repayments? Most fixed rates have a limit on how much extra you can pay down on your loan within the fixed rate term.
  • Are you likely to sell or refinance within the fixed rate term? If so, you could be charged break fees.
  • Are you happy with the revert rate? A lot of banks will revert customers to a higher variable rate after the fixed rate period ends. Work out a plan for when your fixed rate ends.

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Learn more about home loans

What is the difference between fixed, variable and split rates?

Fixed rate

A fixed rate home loan is a loan where the interest rate is set for a certain amount of time, usually between one and 15 years. The advantage of a fixed rate is that you know exactly how much your repayments will be for the duration of the fixed term. There are some disadvantages to fixing that you need to be aware of. Some products won’t let you make extra repayments, or offer tools such as an offset account to help you reduce your interest, while others will charge a significant break fee if you decide to terminate the loan before the fixed period finishes.

Variable rate

A variable rate home loan is one where the interest rate can and will change over the course of your loan. The rate is determined by your lender, not the Reserve Bank of Australia, so while the cash rate might go down, your bank may decide not to follow suit, although they do broadly follow market conditions. One of the upsides of variable rates is that they are typically more flexible than their fixed rate counterparts which means that a lot of these products will let you make extra repayments and offer features such as offset accounts.

Split rates home loans

A split loan lets you fix a portion of your loan, and leave the remainder on a variable rate so you get a bet each way on fixed and variable rates. A split loan is a good option for someone who wants the peace of mind that regular repayments can provide but still wants to retain some of the additional features variable loans typically provide such as an offset account. Of course, with most things in life, split loans are still a trade-off. If the variable rate goes down, for example, the lower interest rates will only apply to the section that you didn’t fix.

What is a fixed home loan?

A fixed rate home loan is a loan where the interest rate is set for a certain amount of time, usually between one and 15 years. The advantage of a fixed rate is that you know exactly how much your repayments will be for the duration of the fixed term. There are some disadvantages to fixing that you need to be aware of. Some products won’t let you make extra repayments, or offer tools such as an offset account to help you reduce your interest, while others will charge a significant break fee if you decide to terminate the loan before the fixed period finishes.

What happens to my home loan when interest rates rise?

If you are on a variable rate home loan, every so often your rate will be subject to increases and decreases. Rate changes are determined by your lender, not the Reserve Bank of Australia, however often when the RBA changes the cash rate, a number of banks will follow suit, at least to some extent. You can use RateCity cash rate to check how the latest interest rate change affected your mortgage interest rate.

When your rate rises, you will be required to pay your bank more each month in mortgage repayments. Similarly, if your interest rate is cut, then your monthly repayments will decrease. Your lender will notify you of what your new repayments will be, although you can do the calculations yourself, and compare other home loan rates using our mortgage calculator.

There is no way of conclusively predicting when interest rates will go up or down on home loans so if you prefer a more stable approach consider opting for a fixed rate loan.

What is the difference between a fixed rate and variable rate?

A variable rate can fluctuate over the life of a loan as determined by your lender. While the rate is broadly reflective of market conditions, including the Reserve Bank’s cash rate, it is by no means the sole determining factor in your bank’s decision-making process.

A fixed rate is one which is set for a period of time, regardless of market fluctuations. Fixed rates can be as short as one year or as long as 15 years however after this time it will revert to a variable rate, unless you negotiate with your bank to enter into another fixed term agreement

Variable rates is that they are typically more flexible than their fixed rate counterparts which means that a lot of these products will let you make extra repayments and offer features such as offset accounts however fixed rates do offer customers a level of security by knowing exactly how much they need to set aside each month.

How does an offset account work?

An offset account functions as a transaction account that is linked to your home loan. The balance of this account is offset daily against the loan amount and reduces the amount of principal that you pay interest on.

By using an offset account it’s possible to reduce the length of your loan and the total amount of interest payed by thousands of dollars. 

Example: If you have a mortgage of $500,000 but holding an offset account with $50,000, you will only pay interest on $450,000 rather then $500,000.

What is a variable home loan?

A variable rate home loan is one where the interest rate can and will change over the course of your loan. The rate is determined by your lender, not the Reserve Bank of Australia, so while the cash rate might go down, your bank may decide not to follow suit, although they do broadly follow market conditions. One of the upsides of variable rates is that they are typically more flexible than their fixed rate counterparts which means that a lot of these products will let you make extra repayments and offer features such as offset accounts.

What is a comparison rate?

The comparison rate is a more inclusive way of comparing home loans that factors in not only on the interest rate but also the majority of upfront and ongoing charges that add to the total cost of a home loan.

The rate is calculated using an industry-wide formula based on a $150,000 loan over a 25-year period and includes things like revert rates after an introductory or fixed rate period, application fees and monthly account keeping fees.

In Australia, all lenders are required by law to publish the comparison rate alongside their advertised rate so people can compare products easily.

What is a standard variable rate (SVR)?

The standard variable rate (SVR) is the interest rate a lender applies to their standard home loan. It is a variable interest rate which is normally used as a benchmark from which they price their other variable rate home loan products.

A standard variable rate home loan typically includes most, if not all the features the lender has on offer, such as an offset account, but it often comes with a higher interest rate attached than their most ‘basic’ product on offer (usually referred to as their basic variable rate mortgage).

What is a honeymoon rate and honeymoon period?

Also known as the ‘introductory rate’ or ‘bait rate’, a honeymoon rate is a special low interest rate applied to loans for an initial period to attract more borrowers. The honeymoon period when this lower rate applies usually varies from six months to one year. The rate can be fixed, capped or variable for the first 12 months of the loan. At the end of the term, the loan reverts to the standard variable rate.

Interest Rate

Your current home loan interest rate. To accurately calculate how much you could save, an accurate interest figure is required. If you are not certain, check your bank statement or log into your mortgage account.

Who has the best home loan?

Determining who has the ‘best’ home loan really does depend on your own personal circumstances and requirements. It may be tempting to judge a loan merely on the interest rate but there can be added value in the extras on offer, such as offset and redraw facilities, that aren’t available with all low rate loans.

To determine which loan is the best for you, think about whether you would prefer the consistency of a fixed loan or the flexibility and potential benefits of a variable loan. Then determine which features will be necessary throughout the life of your loan. Thirdly, consider how much you are willing to pay in fees for the loan you want. Once you find the perfect combination of these three elements you are on your way to determining the best loan for you. 

Does Australia have no cost refinancing?

No Cost Refinancing is an option available in the US where the lender or broker covers your switching costs, such as appraisal fees and settlement costs. Unfortunately, no cost refinancing isn’t available in Australia.

Can I change jobs while I am applying for a home loan?

Whether you’re a new borrower or you’re refinancing your home loan, many lenders require you to be in a permanent job with the same employer for at least 6 months before applying for a home loan. Different lenders have different requirements. 

If your work situation changes for any reason while you’re applying for a mortgage, this could reduce your chances of successfully completing the process. Contacting the lender as soon as you know your employment situation is changing may allow you to work something out. 

Can I get a home loan if I am on an employment contract?

Some lenders will allow you to apply for a mortgage if you are a contractor or freelancer. However, many lenders prefer you to be in a permanent, ongoing role, because a more stable income means you’re more likely to keep up with your repayments.

If you’re a contractor, freelancer, or are otherwise self-employed, it may still be possible to apply for a low-doc home loan, as these mortgages require less specific proof of income.