With the prospect of interest rate rises in 2010, it’s no wonder there is much chatter in the media – and at the weekend barbeque – about refinancing home loans to get a better deal. But what’s involved? And is it really worth the effort?
Easier than you think
“I don’t think it’s as hard and as difficult as people think it is,” says Shaun Cornelius, CEO of InfoChoice. He explains that the perception of refinancing being difficult is related to transaction accounts and direct debits that are linked to your home loan, but says that Government legislation changes have helped that problem. “The banks are now obliged to help you with that process so in a lot of ways that issue has significantly improved.”
As for the process of changing the home loan itself, a Mortgage Broker can be very useful in helping borrowers navigate the transition – from comparing other loan products, to managing the paperwork of a loan application.
David Lock, State Manager for SA and WA at Aussie, says that it’s important for borrowers to have a clear objective in mind when weighing up a refinance. “This varies greatly… from alleviating pressures of school fees, developing a genuine strategy to eliminate the mortgage all the way through to accessing large amounts of money for renovations.” Lock says that the motivation behind the refinance will influence the solution that will suit the borrower for the long term, and that having a clear goal allows a broker to “develop a genuine understanding of the clients true objectives and needs, provide suggestions and input from past experiences and discuss future needs to ‘future proof’ the solution where possible.”
Where to start?
To work out whether the future savings are worth the effort of switching, start with a thorough assessment of the costs and benefits. Christopher Zinn, Spokesperson for independent consumer group Choice, says the Comparison Rate advertised by all lenders is a good place to start, but warns that it has its limits. “It doesn’t actually include all of the fees and charges, and particularly those deferred entry fees.”
Key things to consider
When comparing loans, make sure you take into account the following:
- The interest rate over the long term – Honeymoon rates will go up after the honeymoon, so what seems like a good deal in the first year may end up costing more over the life of the loan.
- The size of your loan – Some lenders offer discounted rates above certain loan limits, so see what applies to your situation.
- The product features – ‘Package loans’ are priced higher than ‘basic loans’, because they offer more features and flexibility. Think about what features you need in your new loan and what you can live without.
- Costs involved in setting up the new loan – Application fees, valuation costs, legal fees.
- Costs involved in leaving the old loan – Discharge fees, ‘break’ or ‘economic’ costs on fixed rate loans, deferred establishment fees and early termination fees.
Zinn says borrowers are often surprised to discover the sting of a deferred establishment fee if it applies to their loan, and that it can “have the effect of locking them into a product”. “If you seek to leave the loan before a certain period, then they will hit you with the fee,” says Zinn. “That is the kind of fee that actually discourages [refinancing].”
Gathering the necessary paperwork
If, once you’ve done your cost-benefit analysis you’re convinced you’re in for a better deal, it’s time to get the paperwork together to apply. Lock says that on top of the completed loan application form and proof of identity (birth certificate, licence etc), you’ll also need items such as:
- Income verification (PAYG: two recent payslips and most recent group certificate; Self-Employed: Last two years tax returns and assessment notices)
- Last six months of statements for current home loan
- Last six months statements for any other facilities being refinanced (such as credit cards, personal loans etc)
- Copy of recent council rates
- Evidence of rental income if an investment property.
If your application is approved, and the refinancing wheels are in motion, the bank that you’re leaving may try and call you to convince you to stay. It’s worth hearing them out to see if they can offer to match – or beat – the deal.
Zinn says that despite the government switching package, the perception that refinancing is too hard remains. “We still have far too many exit costs and transaction costs to move which really both provide a cost hurdle but also discourage people due to the complexity,” says Zinn.
The bottom line
But a bit of complexity now could mean thousands of dollars in savings in the long run. So do your research, and take the time to determine whether the switching pain is worth the savings gain.