An average home buyer or property investor should be able to recoup the cost of refinancing within 12 months, reaping the savings from lower costs for the remaining term, according to analysis.
Banks and other lenders are cutting fees – in some cases eliminating application charges – and lowering borrowing rates in a bid to attract new business or retain existing customers.
But the shrewd borrower needs to check that the carrot used as an inducement is not towered over by the stick, usually by allowing the variable rate to quickly drift above more competitive offerings.
“Check out the lender’s long-term history,” says Mark Hewitt, general manager of Australian Finance Group, the nation’s largest network of mortgage brokers. “Think long term and don’t simply react to an offer – don’t be fooled by a headline rate cut.”
Banks are hungry for long-term customers, such as property buyers, because in addition to selling a mortgage there are spin-off products they might be able to flog, ranging from insurance through to investment products.
That has encouraged most of the big banks and other lenders to drop their application fees for refinancing in addition to offering some of the lowest fixed rates in decades.
Nearly half of the variable home loans on offer have no application fees, representing a 14 per cent increase in the number of lenders that have dropped these costs in the past three years, according to finder.com.au, a company that provides comparative rates on financial products.
Banks and other lenders were strong-armed by the federal government into dropping exit fees for mortgages taken out after July 2011.
“Borrowers should approach their lender for a better deal,” says Hewitt, who reckons those who took out a mortgage before the July 2011 cut-off date should also ask their lender to drop any exit fees, particularly if they are refinancing with the same bank.
“If you don’t ask, you don’t get,” says Hewitt. “The systems for lending are a lot slicker than they used to be,” he says about the ability of bank representatives to respond to client requests.
A couple of examples highlight the range of fees – or negotiating points – that someone refinancing might expect.
Analysis of fees and charges, compiled by finder.com.au, reveals a typical discharge (or exit) fee is about $256. Upfront fees, which include valuation, settlement and legal fees, are about $463.
A holder of an average $300,000 mortgage on the average variable rate of 5.39 per cent who switches to a home loan 25 basis points cheaper would recoup the switching costs in 16 months. Savings over a 30-year loan would total about $16,000.
A borrower who switches to a rate 50 basis points lower would recoup the costs in about 10 months and save $32,500 over the loan term.
“Many borrowers are likely to be scared off switching because of exorbitant fees,” says Michelle Hutchison, a spokesperson for finder.com.au. “But that’s usually a myth.”
Lower interest rates and a huge increase in investors buying investment properties have encouraged a recent increase in refinancing, according to banking experts.
Some cities – like Brisbane, where the volume of auction sales is well under national leaders such as Sydney and Melbourne – are recording big spikes in refinancing, which suggests existing home buyers are shopping around.
As house prices have risen, the national trend appears to have moved from people remortgaging their existing home to buying a new home, either to upgrade or downsize.
“That’s why we are focused on improving our service to customers, both when they apply for a loan and also when they discharge their mortgage,” says Melanie Evans, head of home ownership for Westpac’s financial services division. Westpac owns St George, Bank of Melbourne, BankSA and RAMS.
National Australia Bank also claims to have made big efforts to win and secure mortgage customers with the lowest standard variable among the biggest banks and lowest fixed rates from one to five years.
“We know investors are looking for certainty,” a bank spokesperson says.
ANZ has also spruced up its efforts to attract and retain home and investment property buyers with its “buy ready” package which aims to provide detailed information about how much can be borrowed, detail on the value of a client’s current property and “pay-on-the-day” deposit approval.
A spokesperson for Commonwealth Bank of Australia says it’s a priority to retain customers and any change in circumstances will be reviewed case-by-case.
SWITCH TO CREDIT UNION MADE SENSE
Members of Qantas Credit Union, one of Australia’s largest mutual groups, are financially flying, compared to investors in their namesake’s airline.
Credit union members are being offered $500 cash to switch mortgages from other lenders to their flying kangaroo, which is not affiliated with the troubled airline.
That compares to airline shareholders who have not been paid a dividend in four years and a share price that has nosedived about 80¢ to about $1 in the past year.
Natalie and Kieran McIvor were confident they were not being taken for a ride when they decided to refinance their $600,000 mortgage with the credit union.
Natalie, an accountant with the airline, and Kieran, who runs his own construction business, reckon they have had a smooth landing because of the $500 cash incentive and a lower interest rate.
“We’ve got a better rate and effectively no fee because of the incentive,” says Natalie.
She and Kieran, who have two young children, bought their three-bedroom seaside apartment in inner-suburban Sydney about nine years ago and decided to refinance because of all the usual financial pressures that beset a young family.
Natalie had initial concerns about potential complications, expense and how long it would take for them to cover their costs and start saving.
The incentive meant the cross-over point from paying costs to banking savings happened within six months of completion.