Refinancing: Re-boot your mortgage

By Your Mortgage

 “It’s important to weigh up the costs of leaving your current mortgage with the benefits of switching to another mortgage.” Damien Macrae, head of secured finance at Westpac.

“Loan consolidation may sound tempting but it can involve substantial costs and take you longer to rid yourself of debt.” Dr Michael Dunn, director of consumer communications at Australian Securities and Investment Commission.

When Peter Horwood, a medical imaging specialist and spare-time property investor, approached his bank to take out another mortgage, he was knocked back.

“We were with Westpac, but they wouldn’t loan us any more as we already had four loans in total – secured over three different properties,” he says. Horwood decided to approach other lenders, and attempt to consolidate some of his debt by refinancing.

“We consolidated two variable rate home loans into one with a fixed rate cap, in order to borrow another $200,000 to finance an investment property. We switched from Westpac to Heritage, through our broker at Mortgage Choice,” says Horwood.

Horwood is happy with the new deal that his Mortgage Choice broker John Manciameli was able to strike with Heritage. “We managed to get a rate that was 0.2% lower, and it is a fixed rate capped at 6.3%, which will be handy if interest rates go up. There are no exit fees, and we can pay off extra or draw down funds if we need to – basically we can do whatever we want. Over a period of time, we’ll save thousands.”

In refinancing his loans, Horwood discovered it was beneficial to shop around. “We did a bit of research ourselves. We sort of knew what everyone was offering, obviously interest rates are important but it’s also flexibility – which is not printed on those mortgage tables that you see in the paper. Flexibility will save you a lot of money in the long run.”

Adam Waters, a mortgage broker with Keystone Capital says Horwood is part of a growing trend. “Close to 50 per cent of my business is for refinancing mortgages. There has been a drop-off in investment purchases, and a lot of people are refinancing and consolidating their existing home loan.”

Deregulation of the banking sector and the subsequent arrival of non-bank lenders into the mortgage market has resulted in a corresponding influx of new products, rates and features not previously available in Australia.

“There are very competitive offers in the mortgage market now – people may find that their current product is not as competitive as when they first took out finance,” says Damien Macrae, head of secured finance at Westpac

Sign of the Times

Indeed, in today’s low interest rate climate, refinancing deals may prove far more attractive than those available five years ago, according to Macrae. “A client may have taken out a mortgage that doesn’t have any attractive additional features such as an offset, the ability to switch between lending products or make additional repayments and portability [the ability to move the loan to a new property].

Like Horwood, you don’t need to be in financial difficulty to benefit from refinancing your home loan. There are a number of situations in which refinancing could save you a pretty penny (see box on right).

If you would like to gauge whether you could benefit by refinancing your mortgage, it is essential to thoroughly evaluate your present situation before signing your life away – for the second time. “It’s important to weigh up the costs of leaving your current mortgage with the benefits of switching to another mortgage,” says Macrae.

Sound Out the Market

Experts recommend that after examining your present loan contract, keeping an eye out for any charges for leaving the loan early, it is a good idea to shop around for a new product. “Discuss with a broker about your plans, most brokers will meet with you obligation-free at no cost.

“It is easy to phone a broker who can do all of the hard work for you in shopping around for a better deal,” says Waters. That said, remember that while brokers derive their fee from the lenders whose products they promote and not you, their advice is not necessarily independent.

“Sit down, take the time and ask a broker to provide information about the lenders on offer. Are they trying to sway you towards choosing a particular product? They may be receiving a larger commission from the lender in question,” says Kelvin Skeers, debt consolidation specialist at ACT Mortgages.

What’s the Catch?

Once you have sounded out the market, it is well worth paying a visit to your current lender to see if they are able to match or better any new offer that you’ve discovered. In today’s highly competitive mortgage industry, most lenders will be able to bend on certain fees and charges – though some tend to be more flexible than others.

“Brokers are becoming increasingly flexible as the market becomes more competitive,” says Skeers. “They will often waive the valuation fee, and the lender’s legal fee.”

Waters says traditional lenders such as banks will also waive certain fees. “Lenders may waive the application fee for the new loan, or the valuation fee required for establishing a new mortgage,” he says.

While there is considerable expense in taking out a new mortgage – forking out for lender’s legal fees, establishment and application fees and of course the valuation fee – the single biggest charge that people refinancing are unwittingly hit with is a fee for exiting their current mortgage.

Carefully concealed under monikers such as “deferred establishment fee” or simply “exit fee,” Waters says, “they are becoming more popular with lenders. People often overlook them when they take out a mortgage. Banks are trying to reduce turnover of their clients to other lenders.”

Unfortunately, there is no remedy if you have already taken out a loan that has an exit fee clause, but the good news is that you don’t have to make the same mistake twice, according to Macrae.

“When choosing a home loan, there are lots of ways to avoid fees and charges so that you don’t have to change lenders halfway into the mortgage. Portability is a good way to go, because if you move house then you can elect to take your mortgage with you to the new property.”

To Switch, or Not to Switch?

When shopping for a refinancing product, it pays to think ahead and imagine how your current circumstances may change over the life of the loan. “When you’re thinking about which loan to take out, think ‘Do I want to pay the loan off early?’ Not every lender will charge these fees so it’s important to shop around,” says Dr Michael Dunn, director of consumer communications at Australian Securities and Investment Commission.

Indeed, it may not always be optimal to refinance, even if a competing lender is offering a ‘lower’ interest rate. “Consolidation is not always a good idea,” says Dr Dunn. “Loan consolidation may sound tempting but it can involve substantial costs and take you longer to rid yourself of debt. The monthly payments may be lower but the term of the actual loan will be longer.”

Dr Dunn offers an additional caveat for those wishing to refinance their homes in order to free up equity for other uses. “The general principle is that if you are borrowing to buy something that will increase in value, its okay, but if it’s to finance something that will decline in value, such as a car, then you have to be more cautious.”

If you are borrowing to invest in another asset, such as property or shares, it’s essential to constantly monitor the returns on that investment, says Dr Dunn. “Think of the rate of growth of the investment versus the costs of borrowing the funds.” For example, if you are borrowing at 7 per cent on your home loan, your investment will need to return at least that much in order for the strategy to make financial sense.

It’s also important to be wary of unscrupulous operators when examining alternative mortgage products. “There are lots of people doing door knocking to convince people to consolidate their debt, in exchange for a high upfront fee,’ cautions Dr Dunn.

In short, a number of important decisions await your consideration if you decide to refinance. It’s essential to thoroughly check the terms of your existing loan contract before signing up for a new one – or you may be hit with a hefty fee for exiting your loan early.

Adding extra bells and whistles, or swapping rates will almost certainly increase the flexibility of your mortgage, but may not necessarily make financial sense. However you choose to refinance, you’ll need to do your sums to ensure that your chosen strategy will pay off.