Will a Mortgage Professional Package Improve Your Home Loan?
If you apply for a new home loan in Australia, it's likely that you'll be offered their 'Professional Package' option. Most banks have a pro pack option for mortgages. There are slight differences but they generally follow the structure that you pay an annual fee and become entitled to:
- Their Discount Variable Rate - You get a set discount to the bank Standard Variable Rate. The size of the discount depends on how much you borrow. The larger your loan, the bigger the discount
- Their Discounted Fixed Rates - You can get a slightly lower fixed rate than people who aren't on the package. The discounts don't look as generous as those advertised for variable rates, but we will look at that further later on
- Fee waivers for other bank products - Pro-pack customers can avoid paying fees such as; credit card annual fees, transaction account fees, a fee free mortgage offset, waived application fees on future loans, etc, etc
A pro-pack looks like it'd save you a lot of money, so we decided to have streetonomic look at them. We want to see how much they'd really save you on your mortgage. Rather than worry about services we might not actually use, we decided to focus our attention on your mortgage. We will look at:
How Much Can a Mortgage Professional Package Save You?
For simplicity, we limited our research to the Big 4, being ANZ, CBA, NAB, and Westpac. We are comfortable limiting our study to these lenders because they represent 84% of the Australian mortgage market. We started by looking at what discounts are available for a new variable rate home loan of $350,000, our findings are shown below:
Rates advertised on bank websites June 19th 2015
Based on first impressions, a professional package is a good idea! For an annual cost of just under $400 per year, you can save more than $2,400 (after you have recouped your annual fee). With discounts like this, your professional package would pay for itself until your mortgage is reduced to below $50,000 compared to the standard variable rate. Are the banks really this generous, or is this just clever marketing?
What Variable Rate Can I Get Without a Pro Pack?
Professional packages promote their 'discounted variable rate'. The discount is based on the standard variable rate, but is this a fair basis for comparison? We looked at what rates banks were offering for the same variable loan if the professional package was not taken, our findings are shown below:
Variable Rates advertised June 19th 2015 for $350,000 mortgage with no professional package
You don't need a professional package in order to pay less than the standard variable rate. Each bank offers a no fee basic product which will also give you a discounted rate. They don't offer the other frills, but if all you want it a cheap mortgage, then these rates are available without ongoing package fees.
We compared pro packs and basic options available from each of the big four. Our finding are shown below:
Based on rates and fees found on bank websites June 19th 2015. Any special promotions were included in these rates
If you are looking for the best deal on a no frills variable home loan of $350,000, then a professional package may not be best for you. Unless your mortgage is with CBA, then using a professional package will turn out to be more expensive than the basic option.
$235 per year (at ANZ),may not sound like a big deal, but what would happen if that difference was directed toward your home loan as extra payments. This is shown below:
Created with our mortgage repayment calculator
In the above example, we can see that even though the break free package offers a lower rate, it ends up being the more expensive option. Over the life of the loan, the basic package will get you out of debt almost a year sooner and save you a little over $17,400 in total mortgage repayments. This is based on the assumptions that:
- Rates are constant
- The annual fee for the package is paid through increases to your monthly payments rather than annual lump sums
- Your repayments made on the basic package are a little more than the minimum for a 30 year loan (but are equal to what they would've been on the package)
The professional package will offer other features which may add further value, which we have not considered. Depending on your circumstances, it is possible that the extra discounts available through a package will add more value than the annual fee. A fee free credit card or mortgage offset account, would both save you substantial sums, if you use these features.
What Size Mortgage do I Need for a Pro-Pack to be Worthwhile?
In our first scenario, was based on the rates available for a home loan of $350,000. It suggested that you'd need a variable mortgage of over $900,000 before the professional package was the cheaper home loan. This however is not the case. The discount offered through the package increases the more you borrow. We looked at how professional packages would perform if you had a mortgage of $500,000, the results are shown below:
Now that our mortgage is worth $500,000, 3 of the 4 banks have increased the package discount offered on variable rate home loans. We now see that you will save money by using the professional package with everyone except Westpac (they increase their discount once you borrow $700,000).
Should my Mortgage be on a Pro-Pack?
If you are looking for a new home loan, or looking for better options for your existing one, then we encourage you to research all the options. Whether or not you will save money from using a professional package will depend on:
- The size of your mortgage - If you qualify for a larger discount then the package will be worthwhile
- What other bank services you will use - The professional package is designed to encourage you to bring all your banking to one place. You can have fee reductions on everything from home insurance to transactions accounts. We still recommend shopping around, you might find that someone else is offering an even bigger discount without additional fees.