You got word from your bank today announcing that your variable mortgage interest rate was going up. What could be wrong with shopping around and finding a better deal? Isn’t that what savvy borrowers do? Seems very tempting.
Well, this is one temptation you would be wise to consider carefully.
Many commentators have come out on the side of mortgage swapping and there are internet sites that make it quick and easy to see what’s on offer and compare rates. My advice? You may be better off with the devil you know.
Many of the pundits focus only on interest rates and don’t look at the other costs involved.
Of course, those terrible exit fees have been abolished and, with all the publicity that move generated, you would be forgiven for thinking that switching mortgage providers is now a painless exercise.
But the blunt instrument that could give an unexpected blow to the head is mortgage insurance.
Mortgage insurance exists to protect the lender – not you – if you default on the loan and there’s a loss on the forced property sale. This insurance is compulsory if the loan to valuation ratio (LVR) is more than 80 per cent. The premium is paid once only and the amount depends on the LVR and the size of the loan.
It can vary from lender to lender and will take into account whether you are a first-home buyer or not.
Here’s an example. Brenda and John are planning to buy their first home and are looking for a loan of $570,000. Moneybags Bank has been running an appealing media campaign and is offering the lowest rate of interest. The couple puts up a 5 per cent deposit so the LVR is 95 per cent. The mortgage insurance premium? In the excitement of buying their home, they haven’t given it much thought.
In fact, Moneybags Bank is charging them a premium of 3.9 per cent or $22,230 and, since the insurance is compulsory, Brenda and John just sign on the dotted line.
However, with a bit more homework, our couple may have taken a look at another lender.
True, this other institution has a slightly higher interest rate but would have taken them on for the same loan, only this time with a mortgage insurance premium of 2.41 per cent or $13,737 – that’s a massive difference of $8493.
Brenda and John also overlooked the difference stamp duty makes.
Stamp duty ranges from 5.37 per cent in Queensland to 11.8 per cent in South Australia. In NSW it is 9.66 per cent or a further $2147 on that $22,230 premium.
The mortgage insurance and stamp duty are generally added to the loan, so Brenda and John will be paying it off over the life of the loan.
Let’s bring our story up to the present. Two years have passed since our couple arranged their mortgage and now they find that Moneybags Bank is increasing the rate. In fact, it’s going to be that bit higher than most of the competition and the advice is to shop around.
The new lender with the attractive interest rate demands fresh mortgage insurance. John and Brenda’s house has increased slightly in value in the past two years but their LVR is still going to be over 80 per cent because the loan has been increased by the mortgage insurance premium and stamp duty. Even choosing the cheapest premium will see them facing fees of at least $13,737.
What about moving the mortgage insurance policy from Moneybags Bank to the new lender? That would seem to make sense – it’s still Brenda and John in the same house and now having proved that they make their payments on time. Most mortgage insurance comes from two main insurance companies anyway, right? Sorry, it doesn’t work like that.
Our couple will just have to cough up all over again. They’re also not likely to see a refund of the original mortgage insurance premium.
We need banks and mortgage insurance companies to get together and arrange portability of this insurance. Until they do, don’t fall for the pressure to swap lenders because of small shifts in interest rates.
Too many people focus on headlines and don’t read the full story.
Noel Whittaker is a co-founder of Whittaker Macnaught Pty Ltd. His advice is general in nature and readers should seek their own advice.