Nila Sweeney

Despite the recent massive rate cuts by the Reserve Bank of Australia, Your Mortgage readers, Tim and Jayne O'Grady, are still not getting the benefits of the lower rates.
We asked borrower's agent Michael Lee to work with Tim and Jayne to find out what went wrong and whether anything can be done to set them back on the right path.

Dear Your Mortgage,
My partner and I live in Melbourne. We have a $300,000 mortgage with a lender that was taken over by another company, but kept the same name, and we assumed it would continue operating as normal.
Our situation is such that we had an excellent rate with our original lender prior to the takeover. We were given the best rate they had at the time which allowed us much of the options available in a standard variable loan such as redraw, extra repayments etc.
After the takeover, however, the new lender upped its rates more than any other lender I could find. Additionally, when rates began falling in August 2008, it reduced its rates at a much slower rate compared to other lenders and in smaller increments. After the first 1% cut by the RBA, our lender only passed on 0.7% - and hasn'[t cut it again since.
So, basically, we are now stuck with a lender that fails to pass on the savings to
its customers. Meanwhile, all of this lender's new customers are being given excellent rates and discounts. The best advertised rate by our lender is 0.7% lower than our current rate and we are wondering why the lower rate is not available to us, as existing customers?
Thanks for your time,
Tim and Jayne O'[Grady

Michael Lee'[s analysis
Late last year Tim and Jayne O'Grady contacted Your Mortgage after being bitterly disappointed with their lender's enthusiasm at ratcheting up interest rates in the first half of 2008.
This was followed by a lacklustre response in lowering its rate even after the Reserve Bank slashed official interest rates. Although many lenders were sluggish and somewhat stingy in passing on rate cuts, Tim and Jayne felt their lender was setting a new record - and it wasn'[t a good one.
With penalties and discharge costs approaching 1% of their loan amount, and potential mortgage insurance adding another 1-1.3%, Tim and Jayne didn'[t feel okay with the situation at all.

Their once competitive mortgage has become increasingly expensive. When they took out their current loan, the lender told them it had an offset feature and all the flexibility the O'Gradys needed to save interest and get ahead faster. Once the loan settled, Tim discovered that squeezing interest savings from the loan meant it was more cumbersome and difficult to manage than he had expected. On the surface, it seems the O'Gradys have plenty to gain by switching to a lender with a more competitive rate and a home loan with the features they could really use.
Tim and Jayne are intelligent people. They are professionals with strong incomes and stable employment. They have never struggled with repayments and are confident in their ability to continue making good money. When they bought their first home in 2003, they paid a 20% deposit and were able to purchase an investment unit not long after.
Yet despite all this, the couple - who started out with a 30-year home loan from an award-winning lender - find themselves five years down the track with 28.5 years left on their much larger mortgage, a personal loan and two credit cards. They are not struggling to make payments, but have become increasingly aware that they are not heading in the right direction.
They have heard from both lenders and mortgage brokers alike that consolidating their debts may be beneficial, but having tried this once before, they'[ve learned that all that glitters is not necessarily gold.

Decisions, decisions
In deciding what to do next, the major decisions Tim and Jayne need to make are mostly the same as when they took out their first home loan. This time however, they want to make a careful, informed decision.
As they have dealt with lenders directly and also tried a mortgage
broker, they are now more aware
than ever of the 'cost'[ of making the wrong choices.

The main decisions the couple need help with are:
• what features work best for them?
• should they consolidate their
personal debt?
• is there any value in refinancing?

Decision 1:
What features work best?
Whether you are conducting a health check on your mortgage or choosing a new home loan, it is no different to buying most things. The clearer you are about what you need, want and are prepared to pay, the better the outcome is likely to be. This is why you may have already heard - or read - that the most important step in choosing your loan is to choose the features first.
What you probably don'[t know is there are between 18 and 22 different features that can determine how easy your mortgage is to live with, how much it will actually cost you and how long it takes you to repay it. If you aren'[t sure about what these features are, what they cost and what you need, you should get help before you start comparing home loans. Many borrowers turn to a lender or a mortgage broker for advice, which is exactly what the O'[Gradys did.
Most people don'[t realise 12 to 14 of these features can increase loan costs by up to 100% of the original loan amount, which is why people inadvertently opt for more expensive features every day.
Although it was a combination of factors that led to Tim and Jayne's situation, by repeatedly choosing the wrong features, they delayed repayment of their loan and dramatically increased their interest costs and debt. The couple now owes 50% more than they originally borrowed and it'[s mainly because they put their trust in lenders and mortgage brokers - who are paid to get them further into debt.
A quick review of their existing loan shows that while it is time-consuming, clunky and doesn'[t make the most of interest saving opportunities, it is survivable. The loan does have the ability to accept extra repayments, and for the extra payments to be redrawn when the couple need the money.
A loan with a transactional offset on the other hand, would enable them to move to a single everyday account. And, by centralising their banking, they have a clearer idea of their day-to-day income and expenses, as well as it allowing refinancingthem to auto-debit regular payments, which would save them time and stress. Importantly, all balances in an offset account also reduce interest costs on their mortgage.
Although loans with transactional offset accounts often cost the same as loans without, Tim and Jayne have to weigh up the price of refinancing if they want to access this feature.

Lenders use different terms for different features and offset could mean a range of different features depending on how your lender defines it. Based on what their current lender told them, Tim and Jayne actually thought they were getting a transactional offset account with their current loan. They didn'[t.

Decision 2:
Should they consolidate?
Apart from the very first loan they took out, the subsequent ones involved some form of debt consolidation. On each occasion, whether dealing with the lender or a broker, the benefit emphasised by the 'expert' was the amount of money
the O'Gradys would be 'saving' on their repayments.
However, lower repayments and even a lower interest rate don'[t necessarily result in savings. In fact, almost everyone who opts to consolidate debt and take advantage of new, lower repayments pays two to three times the interest they would have paid if they hadn't consolidated other debt into their home loan.
Worse still, in the case of a couple like Tim and Jayne, the person who recommends they consolidate their debt is also selling them into a new home loan - which results in fees and charges that they probably didn'[t need to pay in the first place. Like most people, they knew they were paying the fees, but as they were added to the loan, it didn'[t seem that important when compared to the 'saving'[ they would be making on monthly repayments.
The bottom line is that Tim and Jayne should not consolidate any of their personal debt into their home
loan. By keeping the credit cards and personal loan separate, they are reminded of their mistake and are also better able to see progress on eliminating these debts. More importantly, although the interest rates are higher than their home loan, the maximum repayment term is shorter which results in the couple paying less interest.

They arealso giving credit cards the flick altogether and are already reducing the balances on the cards as they pay them off to get rid of temptation.

Is there any value in refinancing?
The last time Tim and Jayne refinanced, they paid exit fees and penalties to leave their old lender. They also paid LMI to their new lender and this money has never been recovered.
In deciding whether to refinance, the couple should understand what their options are and how they compare with their current loan. Assuming a better rate and fee structure can be found, they also need to consider how long it will take to recover the costs of refinancing. Although it is a personal decision, it is usually better not to undertake a refinance if you can'[t get back in front within the first two years.
Even though the O'[Gradys had refinanced previously - once with a mortgage broker and then with a lender - they were never provided with side-by-side comparisons between their existing loan and the new options. They were also never told how many years the cost of refinancing would set them back.

Available option
We found three other options for Tim and Jayne that would result in savings of between $37,000 and $54,000 over the remaining term of their loan. These options were products from the Commonwealth Bank, One Direct and Suncorp Metway. These savings are based on minimum monthly repayments and each products fulfils the couple'[s feature wish list - including, among other things, 100% transactional interest offset account.

In spite of these savings, however, refinancing now may still not be prudent. The main cost affecting their decision is whether LMI is payable and if so, how much. Based on the current estimated value of their home, LMI for these three lenders ranges between $3,016 and $4,201. Additionally, in 18 months'[ time, the exit fees payable to their current lender should drop from $2,690 to $690.
Tim and Jayne are now arranging for a bank valuation to determine whether they can escape LMI altogether.
If they can, it could be well worth refinancing now.
If they can'[t though, they should knuckle down with their existing loans and review the situation in 18 months, when both their exit penalties and overall debt levels have reduced.

A final thought
If you are not sure about what features you are taking with your home loan, what they cost and what you need, you need to get help before you start comparing all the different ones available.
Many borrowers turn to a lender or a mortgage broker for advice - which is exactly what the O'[Gradys did.
If your lender either pays or educates the person guiding you through the feature selection part of choosing a home loan, you have a very real problem on your hands. Whenever that person offers to help you, they are faced with a conflict between looking after you and looking after the business that pays them. While some people deal with this better than others, how many professionals have you met who work for free?
If you want professional mortgage help based on your needs alone, there is now an emerging group of mortgage professionals known as borrower'[s agents. This new breed of experts is obliged to act in your interests. A borrower'[s agent cannot accept kickbacks, gifts or payments from lenders.

How to spot a mortgage salesman
Although countless different titles are used to disguise mortgage salespeople, there are three simple questions they can't say no to:
1. Will you arrange my loan for me?

2. Are you paid by the lender directly or indirectly?

3. Will you need to change jobs if you don't arrange credit for someone in the next six months?

Did you know?
Lenders Mortgage Insurance (LMI) premiums are not included in comparison rates and can vary between lenders by as much as 40%?

Refinancing mistakes to avoid

1. Accepting features at face value
Different lenders use the same terms to describe different features. Make sure you understand exactly how the feature affects you and how you will use it. This helps put a price on the value of that feature

2. Taking free advice
Some free advice is either unskilled or dangerous, or, in the end, it isn'[t free. Both lenders and mortgage brokers can make more money out of you simply by guiding your feature selection

3. Consolidating debt for a lower repayment
It almost always costs you more and that small amount of relief today may bring years of pressure and thousands in extra interest later on

4. Apple-to-orange comparison
Make sure you are comparing loans on an apple-to-apple basis. Always use the same repayment term and base your calculations on minimum monthly repayments

5. Trusting comparison rates
Lenders are able to choose which fees they include in the comparison rate and which ones they don'[t. This makes comparison rates unreliable, especially when you are paying costs such as Lenders Mortgage Insurance (LMI) which can vary by thousands between lenders

6. Refinancing blind
Make sure you understand how much refinancing really costs you and how long it will take you to start making real savings

It can be confusing to know whether to get a variable rate or fixed rate mortgage, and what features are important. That's why it's important to not only check the right rates, but make sure that you're getting the right features in your home loan. Get help choosing the right home loan