| refinance, mortgage | 8 Apr 2008 12:00 AM |
| Refinance – not always the right decision by Michelle Kour | |
Many borrowers in Australia are experiencing mortgage stress for the first time because of the increase in interest rates over the last 2 years. When rates are increasing borrowers often consider a refinance of their existing mortgage because they see lower rates advertised in the newspapers and on TV. The fact is that all lenders obtain funds form much the same sources and certainly the majority of these funds come from the global money markets. For this reason while some lenders may offer attractive discount ratesa to encourage you to refinance at the end of the day it is most likely that these trates will increase and the refinance exercise will leave you no better off over the long term.
If you look at the major banks you will se that their advertised standard variable rate is generally same for all 4 banks although for the first time recently there has been a slight variation in the interest rates offered. The non-bank sector has consistently offered lower rates than the banks and generally better featured loan products but are not as active in the honeymoon or discount refinance rate market. The standard rates advertised by the banks do not include monthly fees which the banks generally charge “account-keeping fees” monthly administration fees” all of which add to the cost of your mortgage and must be taken into account when you a considering a refinance of your home or investment loan. The law now requires that where enders state their interest rate they must also state the comparison rate which includes these monthly fees. The lowest advertised rate may not in fact be the lowest comparison rate so look carefully at this when deciding whether to refinance or not.
The other aspect you should consider when looking at a refinance is the exit fees on your existing loan that will apply when you look to repay your loan and refinance elsewhere. What borrowers do not often realise is that when they set up a loan the costs lenders are mindful that borrowers have a lot of other costs such as stamp duty on the purchase and the mortgage, legal fees, valuation fees etc so that the actual cost to the lender at set up stage is carried by the lender. Taken that you refinance and you stay with the same lender for say 5 years then over that time the lender has recouped the set up costs through interest rates. But if you refinance with one lender and then a year later look to refinance again, your loan has not generated sufficient interest to the lender to cover the high set up costs. As a result when you go to refinance the lender includes in the pay out figure not just the principal amount you owe but also an amount to reimburse the set up costs to him.
Exit fees if you refinance will vary depending on whether you are in a fixed rate loan or a variable rate loan. If you are in a fixed rate loan and refinance when fixed interest rates have been falling your exit fees will be higher because when you refinance the lender loses the fixed return you had committed to. e.g. fixed rate on the mortgage you think you might refinance is 8% p.a for 5 years at the time you refinance fixed rates in the market are at 7% you refinance after 3 years i.e. there are still 2 years to run on your fixed rate the lender loses 1% p.a. for 2 years as a result of your refinance on a $300,000 loan this amounts to $6000 should you refinance your exit penalty when you refinance will reflect this loss of $6000.
Thus, if you are moving to a variable rate of say 7.5% when you refinance then in effect you are paying not juts 7.5% but an additional 1% p.a. (8.5%) for 2 years or 2% (9.5% p.a.) in your first year. If rates increase then the likelihood is that your refinance will have done little to improve your long term position.
Instead of a refinance look at other ways to reduce your cash outflow by using the features offered in many mortgages to day.
If you look at the major banks you will se that their advertised standard variable rate is generally same for all 4 banks although for the first time recently there has been a slight variation in the interest rates offered. The non-bank sector has consistently offered lower rates than the banks and generally better featured loan products but are not as active in the honeymoon or discount refinance rate market. The standard rates advertised by the banks do not include monthly fees which the banks generally charge “account-keeping fees” monthly administration fees” all of which add to the cost of your mortgage and must be taken into account when you a considering a refinance of your home or investment loan. The law now requires that where enders state their interest rate they must also state the comparison rate which includes these monthly fees. The lowest advertised rate may not in fact be the lowest comparison rate so look carefully at this when deciding whether to refinance or not.
The other aspect you should consider when looking at a refinance is the exit fees on your existing loan that will apply when you look to repay your loan and refinance elsewhere. What borrowers do not often realise is that when they set up a loan the costs lenders are mindful that borrowers have a lot of other costs such as stamp duty on the purchase and the mortgage, legal fees, valuation fees etc so that the actual cost to the lender at set up stage is carried by the lender. Taken that you refinance and you stay with the same lender for say 5 years then over that time the lender has recouped the set up costs through interest rates. But if you refinance with one lender and then a year later look to refinance again, your loan has not generated sufficient interest to the lender to cover the high set up costs. As a result when you go to refinance the lender includes in the pay out figure not just the principal amount you owe but also an amount to reimburse the set up costs to him.
Exit fees if you refinance will vary depending on whether you are in a fixed rate loan or a variable rate loan. If you are in a fixed rate loan and refinance when fixed interest rates have been falling your exit fees will be higher because when you refinance the lender loses the fixed return you had committed to. e.g. fixed rate on the mortgage you think you might refinance is 8% p.a for 5 years at the time you refinance fixed rates in the market are at 7% you refinance after 3 years i.e. there are still 2 years to run on your fixed rate the lender loses 1% p.a. for 2 years as a result of your refinance on a $300,000 loan this amounts to $6000 should you refinance your exit penalty when you refinance will reflect this loss of $6000.
Thus, if you are moving to a variable rate of say 7.5% when you refinance then in effect you are paying not juts 7.5% but an additional 1% p.a. (8.5%) for 2 years or 2% (9.5% p.a.) in your first year. If rates increase then the likelihood is that your refinance will have done little to improve your long term position.
Instead of a refinance look at other ways to reduce your cash outflow by using the features offered in many mortgages to day.
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