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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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.

Does the Home Loan Rate Promise apply to discounted interest rate offers, such as honeymoon rates?

No. Temporary discounts to home loan interest rates will expire after a limited time, so they aren’t valid for comparing home loans as part of the Home Loan Rate Promise.

However, if your home loan has been discounted from the lender’s standard rate on a permanent basis, you can check if we can find an even lower rate that could apply to you.

Remaining loan term

The length of time it will take to pay off your current home loan, based on the currently-entered mortgage balance, monthly repayment and interest rate.

What are the features of home loans for expats from Westpac?

If you’re an Australian citizen living and working abroad, you can borrow to buy a property in Australia. With a Westpac non-resident home loan, you can borrow up to 80 per cent of the property value to purchase a property whilst living overseas. The minimum loan amount for these loans is $25,000, with a maximum loan term of 30 years.

The interest rates and other fees for Westpac non-resident home loans are the same as regular home loans offered to borrowers living in Australia. You’ll have to submit proof of income, six-month bank statements, an employment letter, and your last two payslips. You may also be required to submit a copy of your passport and visa that shows you’re allowed to live and work abroad.

When do mortgage payments start after settlement?

Generally speaking, your first mortgage payment falls due one month after the settlement date. However, this may vary based on your mortgage terms. You can check the exact date by contacting your lender.

Usually your settlement agent will meet the seller’s representatives to exchange documents at an agreed place and time. The balance purchase price is paid to the seller. The lender will register a mortgage against your title and give you the funds to purchase the new home.

Once the settlement process is complete, the lender allows you to draw down the loan. The loan amount is debited from your loan account. As soon as the settlement paperwork is sorted, you can collect the keys to your new home and work your way through the moving-in checklist.

How is interest charged on a reverse mortgage from IMB Bank?

An IMB Bank reverse mortgage allows you to borrow against your home equity. You can draw down the loan amount as a lump sum, regular income stream, line of credit or a combination. The interest can either be fixed or variable. To understand the current rates, you can check the lender’s website.

No repayments are required as long as you live in the home. If you sell it or move to a senior living facility, the loan must be repaid in full. In some cases, this can also happen after you have died. Generally, the interest rates for reverse mortgages are higher than regular mortgage loans.

The interest is added to the loan amount and it is compounded. It means you’ll pay interest on the interest you accrue. Therefore, the longer you have the loan, the higher is the interest and the amount you’ll have to repay.

Cash or mortgage – which is more suitable to buy an investment property?

Deciding whether to buy an investment property with cash or a mortgage is a matter or personal choice and will often depend on your financial situation. Using cash may seem logical if you have the money in reserve and it can allow you to later use the equity in your home. However, there may be other factors to think about, such as whether there are other debts to pay down and whether it will tie up all of your spare cash. Again, it’s a personal choice and may be worth seeking personal advice.

A mortgage is a popular option for people who don’t have enough cash in the bank to pay for an investment property. Sometimes when you take out a mortgage you can offset your loan interest against the rental income you may earn. The rental income can also help to pay down the loan.

How to use the ME Bank reverse mortgage calculator?

You can access the equity in your home to help you fund your needs during your senior years. A ME Bank reverse mortgage allows you to tap into the equity you’ve built up in your home while you continue living in your house. You can also use the funds to pay for your move to a retirement home and repay the loan when you sell the property.

Generally, if you’re 60 years old, you can borrow up to 15 per cent of the property value. If you are older than 75 years, the amount you can access increases to up to 30 per cent. You can use a reverse mortgage calculator to know how much you can borrow.

To take out a ME Bank reverse mortgage, you’ll need to provide information like your age, type of property – house or an apartment, postcode, and the estimated market value of the property. The loan to value ratio (LVR) is calculated based on your age and the property’s value.