Refinancing myths and reality checks

By Nila Sweeney

Genavieve Zoeller looks at the most common refinancing myths and shows you how to avoid them

Despite the abundance and proliferation of free mortgage information, many borrowers still fall victim to the biggest refinancing myth of all: if you refinance, you'll be much better off financially.
Phillip Minett, mortgage manager with Wizard Home Loans, says it's understandable that borrowers want the best home loan for their situation but the position of their current mortgage can rule the possibility of refinancing out for many.
"When a borrower comes to me in order to explore their refinancing options, I prepare a cost list with them and I ask them a specific set of questions to determine whether they appear to be
good refinancing candidates or not,"
says Minett.
"As much as I'd love all of their business, the honest truth is that it's not in everyone's best financial interest to refinance. But not many borrowers
realise this."

myths dispelled

Myth #1: Low rates are everything
One of the biggest refinancing myths is that a low rate means everything when switching loans, although a low interest rate would undoubtedly trigger pangs of mortgage envy.
Many borrowers often overlook the fact that most of these low rate loans are either deplete of features or that they only last for a certain period and not for the term of the loan. This means that the more likely scenario is that within six months your rate will be on the lower end of 'hot rates' or your loan will be lacking interest-saving features.
Minett gives as an example the basic variable loans and low advertised rates. He says these deals will only be effective for those who require minimal features or flexibility, and aren't for borrowers who need the flexibility of a fully featured loan.
"I can give you a great example of why interest rates aren't everything when shopping for a home loan: Wizard has the cheapest home loan in Australia, but it has no flexibility and you can't make extra repayments," Minett says.
"If borrowers are attracted to this type of low rate loan because they don't want to pay for flexible features they won't be using, then this is understandable. Although for borrowers who are looking for a competitive rate and some variety, this sort of low rate loan isn't necessarily the best for them. This turns out to be the case for most borrowers who enquire about the loan."
Lisa Montgomery, head of marketing and consumer advocacy at Resi, says it's probably better for borrowers to accept a slightly higher interest rate in return for lower fees, decent customer service and transparency in regards to exit fees.
"The big component that borrowers will be looking for in 2009 is service. After being very interest rate driven in 2008, the opportunity has now come for individuals to pocket their $700-800
a month surplus interest rate savings and go searching for competitive service," she says.
Montgomery says this all-round approach will make home loans more economical for consumers in 2009.
"This year will be all about finding solutions to credit, planning and really getting ahead of the market competition for lenders," she notes.
"Borrowers should be looking for businesses that can offer solutions,
safe ideas, get them from A to B the quickest and help them pay off their mortgages faster."

Myth #2: You must change lenders
Another common misconception when refinancing is you have to go to a different lender to get a better mortgage deal. Montgomery says this is often not the best decision at all. Your existing lender should be your first port of call when making comparisons between new loan products in the marketplace, she continues.
"It should always start with your current lender, because they may have
a better solution. See what they can do for you without switching, especially if you're happy with their service."
Staying with your existing lender can not only save you time and hassle, but
can often save you thousands of dollars in exit and establishment fees, as well as the big killer fee - lenders mortgage insurance (LMI).

Myth #3: Refinancing happens quickly because you already have a home loan
Typically, refinancing can take just as long, and can be as nerve-racking as getting your first home loan.
Martin Castilla of Smartline says the entire refinance process should take between three and four weeks to reach unconditional approval. Two of these weeks will be used for getting your home valued and your existing lender being notified of the refinance.
"Your new lender will send a discharge request to your existing lender, and this is where the delays occur. The existing lender can take up to 14 days to repay with payout figures, and they're generally not in a hurry to get rid of that debt," Castilla says.

Myth #4: Debt consolidation is always a good idea
If you truly can't see light at the end of the tunnel and your personal and consumer debts are forcing you backwards financially, consolidating your debts into your existing or a new home loan may be a good idea.
However, it can be a foolish step for borrowers who view consolidation as an ever-revolving lifeline or as a get-out-of-jail-free card.
"This happens a lot," says Castilla. "A borrower will have refinanced to consolidate their debts, and then six months later they've accumulated more consumer-related purchases, or racked up thousands of dollars on their credit card."
Castilla says the risk of consolidation lies in the fact that too many borrowers consolidate all of their debt into the one home loan on a 30-year term.

In return for a massive reduction in monthly commitment, borrowers end up paying more interest than they
would have on their 25% credit card rates because the home loan term is much longer.
Castilla says this short-term patch isn't good for borrowers. "I'm conservative with my consolidation borrowers," says Castilla. "I always encourage a principal & interest (P&I) home loan so they can reduce their total loan amount and push
a term of three to five years only."
Castilla says the borrower may be required to pay around $1,200 a month instead of a minimum of $150, but this allows them to pay off their collective debts through one easy but higher repayment each month - paying off their debt faster.
"This works well for borrowers who have chosen to keep their existing home loan separate and take out a smaller loan secured by their family home. They'll get rid of the loan faster," says Castilla.

Pay off YOYOUR consumer Debt First

An even better strategy is to pay the same amount that you were paying collectively for all of your credit cards, personal loans and home loans before the consolidation.
"It's fascinating how much you can save. Acknowledge your finances and be conscious of them. Invest yourself in your finances as a project and you'll save on such things as refinancing and consolidation," Montgomery says.
The term of your loan can easily be extended if you're finding it hard to manage the higher repayments, or a change in financial circumstances
requires it.
Castilla says it's often a good idea for your broker or lender to attach a condition with your debt consolidation which requires you to show proof that all of your accounts, credit cards and personal loans with other financiers have been closed after the consolidation.

"It's important not to go out and spend the money that you're not putting into your repayments each month, because the debt cycle will begin again. Put it back on the loan," says Castilla.
Any situation where borrowers find themselves with more money in their pockets than the previous months can be a real danger. "And this happens all too often when borrowers refinance," says Montgomery.

Predatory lending/interest rate scams

While Australia has never had a high incidence of predatory lending and major low interest rate scams, ill-informed borrowers get struck more often than you may think.
Thankfully, Montgomery says, with the current credit criteria of LMI providers and funders being tighter, there's now a lot of transparency surrounding predatory lending.
"I think that Australians are more aware of predatory lenders these days and many borrowers are now conscious of ultra-low rate scams," says Montgomery.
"Because competition has been eroded over the last year (and is only now starting to pick up), there are a lot of organisations looking to make a quick win. A lot of these quick wins can come from advertising campaigns for ultra-low rate scams."
Minett agrees, saying the start of increased competition between lenders (thanks to decreasing interest rates) will only encourage predatory lenders to try harder to secure borrowers.
"Competition will be very tight during 2009, and we'll all have to be wary of the 'dodgy brothers' who will try to force clients into loans which don't reflect their best interests," he says.
Be wary of that wolf in sheep's clothing, says Montgomery.
"With a low interest rate environment comes opportunity for lenders to compete. We're going to see deals which come onto the marketplace, which at first glance look fantastic. But look for the catch," she says.
"It can be difficult to avoid predatory lending, so borrowers need to have their eyes open 100% of the time," says Minett.
"They need to obtain their information from a range of different sources and mortgage brokers to find the best home loan option for them." YM