Latest NewsCut Your Home Loan RateTuesday, 20 September 2016

Stick with one institution for all financial services and you can vault your savings into the fast lane.

Home-loan packages that bundle together a mortgage, credit card and transaction account are a good deal, according to the banking industry researcher Canstar Cannex.

Financial institutions use measurements such as "cross-sell" (how many of the institution's products each customer uses) and "share of wallet" (how much of the customer's banking business goes to the institution) to determine the effectiveness of their retail banking operations.

Customers with lots of products generate more revenue for the bank and they are less likely to go through the bother of moving their banking business. Financial institutions are prepared to offer a discount on the standard home loan if the borrower will take the extra products with it.

Canstar Cannex says this is a good deal. The package discount on a variable home-loan rate is usually between 0.5 of a percentage point and 0.7 of a point (50 basis points to 70 basis points).

It is less common to find a discount on a fixed-rate loan and those that are available are smaller than discounts on variable-rate loans. Canstar found that of the 37 home-loan packages it reviewed, eight offered a fixed-rate discount and the range was between 10 basis points and 45 basis points.

The big trade-off is that package loans come with a large annual fee.

The fee can be as much as $395 a year (charged by St George, National Australia Bank, Westpac and BankSA) and as little as $25 (charged by Suncorp on its My Home Package).

Taking the example of a $350,000 loan, a consumer with a typical variable-rate loan at 5.78 per cent (the average of the big four) would pay $20,230 of interest each year, a standard $100 mortgage servicing fee, a $50 credit card fee and $60 in transaction account fees.

The total cost is $20,440. A consumer who chooses the package at a discount rate of 5.08 per cent pays $17,780 of interest each year plus a $350 average package fee. The total cost is $18,130 and the saving over the stand-alone option is $2310.

Even borrowers who might be considering a cheaper basic home loan would save some money using a package, according to Canstar's calculations. Other benefits cannot be measured in dollar savings, such as the convenience of managing your banking through one financial institution.

Canstar says there is quite a bit of competition in the package banking market. Some institutions waive the annual fee on credit card reward programs. Some discount premiums on home and contents and other general insurance products. Others discount financial-planning fees. Some lenders have a single discount rate, while others increase the discount with the size of the loan.

For loans of at least $400,000, NAB had the best deal on rates among the big four banks. Its standard variable rate is 5.74 per cent, matched only by the Commonwealth Bank, but it offers a 70-basis-point discount compared with the 60-basis-point discount from CBA.

At the other end, Westpac offers only a 40-basis-point discount on its 5.81 per cent variable rate for a $200,000 loan. However, it does offer a 70-basis-point discount on larger loans. Canstar gave five-star ratings to ANZ's Breakfree Package, Commonwealth Bank's Wealth Package and St George's Advantage Package (also available through BankSA). What distinguishes the five-star offerings is a wider range of credit card and transaction account options and discounts on insurance premiums.

Surprisingly, ANZ and Commonwealth have applied maximum loan-to-valuation ratios of 90 per cent, while all the others will lend up to 95 per cent of the value of the property (Westpac will lend 97 per cent).

All the lenders in the Canstar review offer redraw and offsets with their packages. Another common feature of the highly rated packages is that the associated credit cards come with rewards programs.

BankWest's Plus Package (rated three stars) has the weakest credit card offering, with no annual fee waiver and no rewards program offered with any of the six cards available. One area where lenders could improve is by offering better discounts on fixed rates.

Of the packages that scored three stars or better, only Commonwealth and St George include a fixed-rate discount in their packages and the discounts are small – 15 basis points in each case.