Moving your mortgage to another lender
Shifting mortgage lenders can be a complex and expensive exercise. Picture: Vanessa Hunter Source: The Australian
Aside from the mountain of paperwork involved in any new loan application, there's anywhere up to $10,000 in costs, especially if you terminate your existing contract earlier than the stated term, which could be up to 30 years.
Hillross adviser Toby Winten says people need to take a deep breath before rushing into refinancing.
"If you are refinancing to consolidate debt, keep making the same repayments, otherwise you will worsen your financial position," Winten says.
"Also ask your lender for a better deal on your existing loan. Tell them you are considering refinancing and ask if you can access the deals they are offering new customers."
BREAK FEES
If you've only been with the lender for a few years, chances are they are going to sting you for a "break fee" or "early termination fee" which will leave you considerably poorer.
If you are trying to get out of a fixed rate loan, expect to pay a hefty break fee.
Finding out what the average fee is can be very difficult for some borrowers, bordering on misleading, says Ivan Karamatic, national operations and risk manager at broker Loan Market.
"If the loan is paid out in full in the first four years, an early repayment fee will apply. For the major banks, this fee varies from $700 to $1200," he says.
Non-bank lenders often charge customers about 2 per cent to 2.5 per cent of the loanbalance.
On the average size loan of $300,000, this could mean more than $6000.
Club Financial Services director of sales and marketing Simon Norris says because you break your contract with your lender, they will expect some compensation for any losses that break may trigger.
"Break fees vary between lenders and are individual to the loan, taking many considerations into account, including the length of time left in the contract, ongoing repayment amounts, as well as whether the loan is fixed or variable," Norris says.
INTEREST RATES
"The decision on whether to fix your interest rate is always a difficult one, as no one has a crystal ball on what interest rates will do," Norris says.
"Twenty different economists will have 20 different opinions none of them really know for sure." Personal circumstances may change many times over your life and, as a result, the mortgage you have may no longer be appropriate.
"From the outset, I strongly believe in taking the time to look at a variety of home loan options," Norris says.
"It's unheard of these days for a client to have the same mortgage for 30 years."
MOVING TIME
While the ideal situation may be not to change loans, there are many reasons people consider moving their mortgage, including a better interest rate, unlocking equity in their home, renovating and other types of debt consolidation.
"For example, many people with a young family may feel there is very often precious little money for investment, however, these people could consider refinancing their home loan to assist with wealth creation," Norris says.
"Unlocking equity in their home may give them the funds to act now and improve their long-term financial situation."
As a general rule, fixed rate loans are more restrictive than variable loans and therefore incur larger exit fees if you want to end the contract early.
"Perhaps a surprising statistic within our group was that over the past year, 98 per cent of our clients have chosen a variable loan, as opposed to a fixed rate," Norris says.
"During the recent periods of economic uncertainly, banks raised their fixed rates for fear of rising costs of funds eating into their profits.
"This disparity between 'attractive' variable rates and higher fixed rates discouraged take-up of fixed rate loans," Norris says.
NEW LOAN OPTIONS
The Queensland Teachers' Credit Union is one of the first financial institutions in Australia to introduce a product that moves in line with the official cash rate but not any more.
The credit union, which is open to all the public, says people are nervous about rates moving higher that the RBA cash rate.
"The Mortgage Tracker is for people who want reassurance that the interest rate on their loan follows the RBA's recommendation. It's clear, it's simple and straight forward," says QTCU chief executive Mike Murphy.
Loan Market chief operating officer Dean Rushton says demand for housing finance was already weak as a result of the RBA implementing three rate rises earlier in the year.
"We are now seeing changes in policy with some banks increasing their lending ratios," he says.
"Most lenders have also reduced their fixed rates and are even offering spring specials to increase business."
SWITCHING COSTS
Chris Burns, chief executive of finance broker KeyInvest, says some fixed rates have enormous payout penalties.
"It all depends on when people took their loans out. If you're thinking of moving house in two or three years' time, ask if you can take that loan and move it to another property," he says.
"Get good advice before you sign a mortgage or if you're thinking of moving from a current mortgage provider. People like to take out honeymoon rates and then they go on to the standard variable rate. There are far better ways to go these days."
REFINANCING
It is estimated that 30 to 40 per cent of home loan applications are people interested in refinancing their mortgage.
Smartline Personal Mortgage Advisers managing director Chris Acret says refinancing your mortgage is something that should be done only after careful consideration.
"Under recently introduced consumer credit regulations, a mortgage adviser needs to show that the product and lender are deemed 'not unsuitable' and need to be able to demonstrate to you the benefits of refinancing and explain why a specific product and specific lender is being recommended," Acret says.
You also need to be aware there may be fees charged by your new lender which could include an application fee, government charges and searches.
It may be you have a basic loan now but you want one with extra features, such as a repayment honeymoon or a redraw facility, because one partner is going to stop working for a while to stay at home with the baby.
Alternatively, you might have a loan with all the extras but find you don't use them and you would prefer a basic loan with a lower interest rate, or one that doesn't allow you such easy access to your funds.
Acret says refinancing doesn't necessarily have to involve moving lenders.
"A good mortgage adviser will always look at your existing lender in the first instance to see if what you want to achieve both in the short and long term can be done with your existing lender," he says.
"If it can, this may negate some of the costs."
- By Alex Tilbury
- From: News Limited newspapers
- September 13, 2010
Shifting mortgage lenders can be a complex and expensive exercise. Picture: Vanessa Hunter Source: The Australian
- Can be costly to move lenders
- Many ways to avoid pitfalls
- MOVING your mortgage from one lender to another is not as simple as it sounds.
Aside from the mountain of paperwork involved in any new loan application, there's anywhere up to $10,000 in costs, especially if you terminate your existing contract earlier than the stated term, which could be up to 30 years.
Hillross adviser Toby Winten says people need to take a deep breath before rushing into refinancing.
"If you are refinancing to consolidate debt, keep making the same repayments, otherwise you will worsen your financial position," Winten says.
"Also ask your lender for a better deal on your existing loan. Tell them you are considering refinancing and ask if you can access the deals they are offering new customers."
BREAK FEES
If you've only been with the lender for a few years, chances are they are going to sting you for a "break fee" or "early termination fee" which will leave you considerably poorer.
If you are trying to get out of a fixed rate loan, expect to pay a hefty break fee.
Finding out what the average fee is can be very difficult for some borrowers, bordering on misleading, says Ivan Karamatic, national operations and risk manager at broker Loan Market.
"If the loan is paid out in full in the first four years, an early repayment fee will apply. For the major banks, this fee varies from $700 to $1200," he says.
Non-bank lenders often charge customers about 2 per cent to 2.5 per cent of the loanbalance.
On the average size loan of $300,000, this could mean more than $6000.
Club Financial Services director of sales and marketing Simon Norris says because you break your contract with your lender, they will expect some compensation for any losses that break may trigger.
"Break fees vary between lenders and are individual to the loan, taking many considerations into account, including the length of time left in the contract, ongoing repayment amounts, as well as whether the loan is fixed or variable," Norris says.
INTEREST RATES
"The decision on whether to fix your interest rate is always a difficult one, as no one has a crystal ball on what interest rates will do," Norris says.
"Twenty different economists will have 20 different opinions none of them really know for sure." Personal circumstances may change many times over your life and, as a result, the mortgage you have may no longer be appropriate.
"From the outset, I strongly believe in taking the time to look at a variety of home loan options," Norris says.
"It's unheard of these days for a client to have the same mortgage for 30 years."
MOVING TIME
While the ideal situation may be not to change loans, there are many reasons people consider moving their mortgage, including a better interest rate, unlocking equity in their home, renovating and other types of debt consolidation.
"For example, many people with a young family may feel there is very often precious little money for investment, however, these people could consider refinancing their home loan to assist with wealth creation," Norris says.
"Unlocking equity in their home may give them the funds to act now and improve their long-term financial situation."
As a general rule, fixed rate loans are more restrictive than variable loans and therefore incur larger exit fees if you want to end the contract early.
"Perhaps a surprising statistic within our group was that over the past year, 98 per cent of our clients have chosen a variable loan, as opposed to a fixed rate," Norris says.
"During the recent periods of economic uncertainly, banks raised their fixed rates for fear of rising costs of funds eating into their profits.
"This disparity between 'attractive' variable rates and higher fixed rates discouraged take-up of fixed rate loans," Norris says.
NEW LOAN OPTIONS
The Queensland Teachers' Credit Union is one of the first financial institutions in Australia to introduce a product that moves in line with the official cash rate but not any more.
The credit union, which is open to all the public, says people are nervous about rates moving higher that the RBA cash rate.
"The Mortgage Tracker is for people who want reassurance that the interest rate on their loan follows the RBA's recommendation. It's clear, it's simple and straight forward," says QTCU chief executive Mike Murphy.
Loan Market chief operating officer Dean Rushton says demand for housing finance was already weak as a result of the RBA implementing three rate rises earlier in the year.
"We are now seeing changes in policy with some banks increasing their lending ratios," he says.
"Most lenders have also reduced their fixed rates and are even offering spring specials to increase business."
SWITCHING COSTS
Chris Burns, chief executive of finance broker KeyInvest, says some fixed rates have enormous payout penalties.
"It all depends on when people took their loans out. If you're thinking of moving house in two or three years' time, ask if you can take that loan and move it to another property," he says.
"Get good advice before you sign a mortgage or if you're thinking of moving from a current mortgage provider. People like to take out honeymoon rates and then they go on to the standard variable rate. There are far better ways to go these days."
REFINANCING
It is estimated that 30 to 40 per cent of home loan applications are people interested in refinancing their mortgage.
Smartline Personal Mortgage Advisers managing director Chris Acret says refinancing your mortgage is something that should be done only after careful consideration.
"Under recently introduced consumer credit regulations, a mortgage adviser needs to show that the product and lender are deemed 'not unsuitable' and need to be able to demonstrate to you the benefits of refinancing and explain why a specific product and specific lender is being recommended," Acret says.
You also need to be aware there may be fees charged by your new lender which could include an application fee, government charges and searches.
It may be you have a basic loan now but you want one with extra features, such as a repayment honeymoon or a redraw facility, because one partner is going to stop working for a while to stay at home with the baby.
Alternatively, you might have a loan with all the extras but find you don't use them and you would prefer a basic loan with a lower interest rate, or one that doesn't allow you such easy access to your funds.
Acret says refinancing doesn't necessarily have to involve moving lenders.
"A good mortgage adviser will always look at your existing lender in the first instance to see if what you want to achieve both in the short and long term can be done with your existing lender," he says.
"If it can, this may negate some of the costs."