The AFG Mortgage Index indicates around 35% of new home loans were due to refinancing. At the same time, a survey for Ernst and Young by Quantum Market Research found 65% of borrowers were looking to be rewarded for loyalty with lower fees and better rates. However, a third of potential switchers admitted they gave up because there were too many choices to wade through with too complex information. In other words, we would like a better deal, but many of us find it too hard or lack the time to find one.
Now, however, is a good time to strike a better deal. A flat property market means fewer new loans for lenders, so many are keen to create churn among existing borrowers.
Why switch?
As the Ernst and Young survey highlights, many borrowers believe they are currently getting a raw deal. This sentiment is amplified by many lenders’ reluctance to pass on official interest rate cuts in full. Australian banks had, on average, passed on 116% of each rate rise and only 84% of each cut, according to the Australian Economic Record.
Quite simply, the best reason to switch is to get a better deal so you can pay your house off sooner. You might also be shopping around so you can bundle personal debts, such as credit cards, store cards, car loans and personal loans, into your home loan. While this is a smart move – it will slash the amount you fork out in interest payments – it won’t help you pay your mortgage off sooner because you’re adding to your overall loan amount.
Let a Mortgage Broker take on the burden
You won’t know if you can get a better deal until you start looking, which is where many throw up their hands in surrender. Talk to your broker first so he or she can share their insights about the broader home loan environment.They deal with dozens of lenders and hundreds of loan products so they have their finger on the pulse, plus resources at their disposal that will take the heavy lifting out of the homework – the very reason why many claim they can’t be bothered to switch.
The costs of switching
It’s important you understand upfront, it costs to switch. The good news is that it generally costs less than it used to, thanks to the scrapping of early exit fees since July last year. However, there are still fees and charges involved in moving loans, and break fees are still applied to fixed rate loans.
Generally, you can expect to pay:
A discharge and registration of mortgage fee of about $190.
A settlement fee of $100 to $250.
An application and valuation fee of about $600.
Some lenders entice borrowers with payments to help offset switching costs. Most lenders will also offer a discount on the application fee, or waive it altogether, if existing customers are switching to a different loan product under their umbrella.
Lenders are now also charging one-off annual fees for interest rate discounts for the life of the loan. These are often attached to off-set loans, where the loan account acts as a line of credit. The more you pay into the account, the less you pay in interest, and you can deposit and withdraw at any time, just like a regular savings account. With the average mortgage now tipping $300,000, the $300-500 fee is well worth the discounted rate on these offset facilities.
The pitfall with this arrangement is not the fee, but how borrowers choose to use the account. If you are taking full advantage of the offset facility and paying down the amount you owe, you will come out well on top. If, on the other hand, you keep drawing down on the money available, you are probably paying way more in interest than you would with a traditional home loan.
Get the facts
One of the best ways to understand all of the pros and cons of a loan product is to ask the lender for a fact sheet. Many lenders don’t offer fact sheets upfront, but they are now required to provide one if you ask.
Key fact sheets provide information in a set format so it’s easier for you to compare loans. They also highlight important information, such as the total amount to be paid back over the life of the loan.
Beware of shrinking values
In some cases, property values have dipped, so one of the trickier aspects of switching is knowing how much equity you have (the current value of your home, minus what you owe). If you bought in recent years and borrowed near or to your limit, you may find you have insufficient equity to secure a new loan, or that you have to pay additional hefty charges in the form of lenders mortgage insurance (LMI).
If you need to borrow more than 80% of the value of a property, you will be charged LMI to cover the lender if you default on the loan. It can add thousands to a loan and, what’s more, it’s not portable. If you already have LMI incorporated in your loan, you will have to take out a new policy with the new lender if you switch.
Your circumstances
Whether you make the switch or not, will always come down to your circumstances. Critical factors include:
How much you owe on your existing loan and how long it will take to pay it off.
Your earning potential now and in the future.
How long you plan to stay in your existing home.
Whether your living costs will increase in coming years (having children, for example).
Your Mortgage Broker is the best person to weigh up all of these factors, work out whether you should switch and then help find the best new loan for you. They will also manage all of the paperwork to help make the switch as simple as possible.