| refinance, mortgage | 8 Apr 2008 12:00 AM |
| SHOULD YOU REFINANCE YOUR LOAN? by Michelle Kour | |
As the global credit crisis continues to play havoc with interest rates in Australia many borrowers are scurrying for relief by seeking to refinance their home and investment loans.
However this refinance strategy does not always achieve its objective and borrowers can often be left in a worse position than that which was the status quo.
It is important that proper research be conducted before a refinance is initiated. Just as importantly borrowers must be absolutely certain that the interest rate differential they are seeking to achieve is sustainable in the medium term.
Prior to the credit crisis, when things were “normal”, it was rare for a lender to move its variable interest rate beyond any movement in the official cash rate as determined by the RBA. Therefore it was relatively easy to measure the benefit, if any, gained by the refinance of one’s loan. Simply one only needed to calculate the difference in loan repayments between what they were previously paying under the old interest rate and those that would be applicable under the new rate over the remaining loan term. After accounting for all loan costs associated with the refinance eg discharge costs and set up costs for the new loan, a borrower could ascertain the break even point and decide whether or not a refinance of their loan was a worthwhile exercise. If one ignored “honeymoon” type interest rates or the like, it would be fairly safe to assume that the interest rate differential would be maintained over the life of the loan as the interest rates of both loans would invariably move in line with movements in the official cash rate.
However it is no longer safe when one is deciding to refinance, to make such an assumption. We are now seeing lenders who are raising loan interest rates independently of official cash rate movements. Moreover the timing of interest rate changes varies from lender to lender. The big banks at first tried to give the impression that they were insulated from the impact of the credit crisis. They delayed increasing interest rates while several non banks were forced to do so. Clearly this strategy enabled the banks to increase market share as they were able to attract customers who saw an opportunity to improve their position by completing a refinance of their loan with a bank who was advertising a more favourable interest rate. Sadly for those borrowers the banks have now increased their interest rates and have finally “fessed up” that they are affected by the global credit crisis just as other non bank lending institutions. Borrowers who have gained by refinancing their loan during this period have now come back to the field. And they have borne the costs and hassles of effecting the change. There is also no guarantee that their chosen lender will not increase rates beyond average market movements in the future. To the contrary, all banks are signalling further increases, independent of any Reserve Bank rate rise.
The message is clear. Think carefully before jumping on the refinance bandwagon. Your current lender who might appear to be uncompetitive today could well be a market leader tomorrow. It just might pay to stay with the devil you know.
However this refinance strategy does not always achieve its objective and borrowers can often be left in a worse position than that which was the status quo.
It is important that proper research be conducted before a refinance is initiated. Just as importantly borrowers must be absolutely certain that the interest rate differential they are seeking to achieve is sustainable in the medium term.
Prior to the credit crisis, when things were “normal”, it was rare for a lender to move its variable interest rate beyond any movement in the official cash rate as determined by the RBA. Therefore it was relatively easy to measure the benefit, if any, gained by the refinance of one’s loan. Simply one only needed to calculate the difference in loan repayments between what they were previously paying under the old interest rate and those that would be applicable under the new rate over the remaining loan term. After accounting for all loan costs associated with the refinance eg discharge costs and set up costs for the new loan, a borrower could ascertain the break even point and decide whether or not a refinance of their loan was a worthwhile exercise. If one ignored “honeymoon” type interest rates or the like, it would be fairly safe to assume that the interest rate differential would be maintained over the life of the loan as the interest rates of both loans would invariably move in line with movements in the official cash rate.
However it is no longer safe when one is deciding to refinance, to make such an assumption. We are now seeing lenders who are raising loan interest rates independently of official cash rate movements. Moreover the timing of interest rate changes varies from lender to lender. The big banks at first tried to give the impression that they were insulated from the impact of the credit crisis. They delayed increasing interest rates while several non banks were forced to do so. Clearly this strategy enabled the banks to increase market share as they were able to attract customers who saw an opportunity to improve their position by completing a refinance of their loan with a bank who was advertising a more favourable interest rate. Sadly for those borrowers the banks have now increased their interest rates and have finally “fessed up” that they are affected by the global credit crisis just as other non bank lending institutions. Borrowers who have gained by refinancing their loan during this period have now come back to the field. And they have borne the costs and hassles of effecting the change. There is also no guarantee that their chosen lender will not increase rates beyond average market movements in the future. To the contrary, all banks are signalling further increases, independent of any Reserve Bank rate rise.
The message is clear. Think carefully before jumping on the refinance bandwagon. Your current lender who might appear to be uncompetitive today could well be a market leader tomorrow. It just might pay to stay with the devil you know.
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