by Jeremy Cabral
Switching home loans isn’t something to be scared of. Everyone should examine their home loan arrangements regularly. There may be big savings you can access. But don’t make one of these mistakes.
1. Refinancing when your property has lost value
Since the GFC, some Australian homeowners have experienced the uncomfortable (and unaccustomed) feeling of seeing the value of their homes slide southward. This can be a very problematic situation for borrowers wishing to refinance.
Losing value on your property reduces the value of your equity, which can drive you into both a higher interest rate loan and, also, if your Loan-to-Value Ratio (LVR) rises above 80%, Lenders Mortgage Insurance (LMI) may be payable again in full. This is especially bad for self-employed borrowers and owners of rural properties, who are often required to have more equity to be exempt from LMI.
2. Not crunching the numbers on exit fees and costs
Are you going to be better off financially for making the switch? It seems like an obvious question, but some people think the answer lies solely in the difference between their current interest rate and the interest rate of another product.
Fees for exiting your current loan and switching to a new loan could outstrip the interest rate savings. You won’t know until you check, so review it carefully.
Exit fees on variable rate loans are now prohibited, but loans signed prior to July 2011 may still get slugged.
There are many more fees that can apply, so get a full quote from your lender on the cost of exiting.
3. Refinancing during a fixed interest period
Fixed interest loans may have exit fees for borrowers looking to switch. Most are very punitive, allowing lenders a healthy profit margin, and a coercive means of customer retention. You could be worse off in fees for switching, so explore your obligations with care.
4. Switching after your credit record has an infringement
It is far easier and cheaper to secure a loan when your credit record has no infringements. Check to see if your record has been default listed or contains serious infringements since your original home loan. If you know what everyone else is seeing, you’ll be able to move toward solutions with full transparency.
5. Not checking the comparison rate
Many borrowers are beguiled by the traditional headline interest rate and use it alone to compare loans.
A comparison rate is a more practical tool because it’s one interest rate figure that also takes into account ongoing fees. Known upfront and ongoing fees, of course, add to the cost of a loan. A comparison rate provides a better way of comparing apples with apples.
Don’t forget that while comparison rates do help make sense of your options, these rates are based on a $150,000 loan over 25 years. So difference loan amounts and repayment periods will affect those rates too.
Where can you go to refinance?
- Your lender.
- A comparison website for home loans.
- A mortgage broker.