Since the credit crack up, and regulator crack down, mortgage holders can be forgiven for feeling like they have diminished power.
Official and actual interest rates no longer bear any relation to each other, as lenders hike willy-nilly. Interest-only borrowers are being squeezed more than most. And all the maverick rate moves have created an almost tangible panic that is seeing many ask their lender to fix their rate.
Well I say: wait!
Commit to a fix and you are committed to that loan for, say, another three years. And, chances are, you should have left that lender for a cheaper deal years ago.
No exit fees to stop you
Many Australians don’t realise that it has been illegal to charge exit fees since 2011. That’s on loans taken out since then, which it’s possible yours was.
But even if you’ve held your mortgage for longer than that, any penalty has to be fair and commensurate with the lender’s actual loss … ASIC has decreed it so.
Long gone is the threat of a penalty as high as 5% of your loan, or $17,500 on an average $350,000 loan.
The exception, to return to the fix point, is when you sign a contract for a period of time – say a three-year fixed rate. If you leave because you’ve found a better offer, the ‘commensurate’ penalty could be large indeed.
Low entry fees to prompt you
Enhancing Aussies’ relatively new-found mortgage mobility is fierce competition in the marketplace. With many new entrants, not just interest rates but also up-front fees have been tumbling.
While, a decade ago, it was not uncommon to have loan establishment fees of, say, $1000, oftentimes today you will pay very little. Valuation fees have come right down, too.
The test for how much you’ll pay up front, and on an ongoing basis, is something called the comparison rate. This second interest rate will be displayed alongside the ‘headline’ rate, and give you an indication of the true cost of the loan, taking into account fees.
It helps you make a ‘comparison’ of available mortgage products.
Huge potential savings
But I can’t be bothered switching, I hear you say. Then you need to realise the potential savings are enormous.
We’ll assume you currently have a $350,000 mortgage at an interest rate of 5.5%… these expensive loans are not uncommon either.
Shift it to a lender charging only 4% – they get even cheaper than that – and your total interest bill drops more than $90,000, from $294,792 to $204,229.
By the way, that puts an extra $301 a month in your pocket.
However, if you don’t actually need that – after all, you are used to doing without it – you could take your interest rate savings to a whole new level.
Simply keep your repayments the same and for ‘free’, you add nearly $50,000 to your interest saving.
Are you motivated to do a quick interest rate search now?
Just watch lenders’ mortgage insurance
The only thing that may stop you from remortgaging is lenders’ mortgage insurance. Now, this is a crazy type of insurance for which you pay the premiums and from which the lender, and not you, derives the protection. It protects them in the event you default on your mortgage and they don’t recoup what you owe from the sale of your property.
(Many people get this confused with mortgage protection insurance, which can cover a borrower’s loan repayments if they are suddenly unable to meet them.)
Crazier still, LMI is not portable, although you may get a partial refund if you discharge the loan within two years. If you move lenders, you may have to fork out to some extent again.
Thankfully, you only pay lenders’ mortgage insurance if you borrow 80% or more of a property’s value. It is generally paid by first home buyers for whom saving the full 20% deposit, plus costs, may not be realistic.
Below an 80%, what’s called loan-to-value ratio (LVR), there is usually no lenders’ mortgage insurance… and it’s worth noting borrowing only this amount means you can usually access the market’s cheapest interest rates as well.
House price growth may have even pushed you below an 80% refinancing LVR without you realising it.
So how soon is too soon to switch?
If you have 20% or more equity in your home, it’s virtually never too soon to refinance. If there’s a cheaper product, your ultimate interest savings are probably enormous.
This information is general in nature and you should always seek professional advice when making financial decisions.