Some Risks, But Refinancing A Lure
Sydney Morning Herald
Friday April 5, 1996
It marks the next step in the evolution of that favourite Australian sport: bank-bashing.
Bank customers are done with sledging their bank from the sidelines and have taken their natural hostility towards financial institutions to a new level by demanding, and getting, a better deal on their home loan.
Consumers aren't just threatening to leave their bank for a cheaper rate or more flexible repayment schedule, they are doing it. The popularity of refinancing home loans has surged.
According to the Australian Bureau of Statistics, more than 20 per cent, or about $10 billion, of the home loan business last year came from dissatisfied customers switching their mortgage to a more competitive financial institution.
Fuelling the explosion in refinancing has been the rise of cheap non-bank lenders such as Aussie Home Loans which have given consumers an unprecedented opportunity to switch to a loan with a lower rate.
"It's happening more and more and more," said the managing director of interest rate comparison service Cannex, Mr Andrew Willink, of the trend to refinance home loans. "And that percentage (20 per cent) is increasing for sure."
But while a competitive home loan market is undoubtedly a long-awaited boon for longsuffering home loan customers, there are potential pitfalls that borrowers should keep in mind.
The most obvious concern for borrowers thinking of refinancing is fees. Even most variable rate loans will charge an exit fee, usually one month's interest. Fixed-rate loans have break costs of up to three months' interest.
Also, the interest charge on exiting is often based on the total amount borrowed rather than the outstanding amount. Then, loan stamp duty of $100 to $200 has to be paid.
And that's before the costs associated with the new loan. Application fees usually range from $500 to $1,000 before property stamp duty and mortgage insurance are paid.
There may also be other disbursements such as survey costs and building reports if any renovations have been completed since the original mortgage was taken out.
"It's not difficult for the different fees to start adding up and suddenly the cheap refinance is costing you nearly $3,000," said Mr Bill Rankin, national lending services manager with Mortgage Choice, a mortgage introduction firm.
"The savings (from switching to a loan with a lower interest rate) are often eaten up for the first year entirely."
Mortgage Choice's analysis shows that switching a $120,000 mortgage from a major bank with a variable rate of 10.5 per cent to a mortgage manager with a variable rate of 8.85 per cent will cost $795 more for the first year of the new loan.
However, assuming the interest rate differential remains, the savings then start rolling in, totalling more than $35,000 over the life of a 25-year mortgage.
Mr Rankin said there were two major lessons from the analysis. First, trying to prolong an interest rate "honeymoon" by chasing teaser one-year rate deals with different institutions is pointless and costly.
Second, it is vital that borrowers have some confidence that the new, cheaper lender they have hooked up with will keep rates low. If the rate spikes up again, refinancing would be a costly waste of time.
Of course, there can be no guarantee that any institution will keep rates low. But borrowers can protect themselves somewhat by closely checking the history and funding structure of the new lender and the particular loan they are taking out.
In this new ultra-competitive environment, the best way to get a cheaper home loan deal may be to haggle vigorously with your existing lender. Threaten to leave and you stand a good chance of getting the lower interest rate without the nasty costs of switching banks.
HOW REFINANCING CAN HURT Present lender: Proposed lender: major bank mortgage manager Amount: $120,000 $120,000 Current interest rate : 10.5% 8.85% First year's interest: $12,545 $10,560 Application fee: $600 Mortgage insurance: $200 Loan stamp duty: $480 Disbursements: $250 Loan break costs (one month's interest) $1,050 Other costs $200 Total first year costs: $12,545 $13,340
© 1996 Sydney Morning Herald
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