The big banks may be increasing their mortgage interest rates, but that’s no reason for their mortgage customers to meekly accept higher repayments.
Janine Louden was not going to just let inertia rule and do nothing when mortgage interest rates fell below what she was paying on her fixed-rate mortgage.
She is refinancing the loan she has with her husband on their house in Newcastle in NSW, switching lenders after only 12 months.
“For us it is mostly about more money in our pocket to pay off the mortgage,” Louden says.
The IT contractor and her husband are refinancing halfway through a two-year fixed rate mortgage with one of the big banks.
Interest rates have fallen in the past year and mortgage broker Geoff Brooke, with aggregator VOW Financial, was able to find the family a better deal with another of the big banks.
The new home loan is split between 75 per cent variable and 25 per cent fixed. Their new rate is 4.58 per cent on the variable component and 4.29 per cent on the fixed component. They were paying 4.84 per cent with their previous bank.
Louden says moving to a mostly variable loan is “a bit of an educated guess” that interest rates will stay low, but she will review it in a year’s time.
Louden and her husband had to pay a small break cost to end the fixed-rate mortgage early but she says the savings from a lower interest rate will be worth it.
There won’t be any friction with switching bank accounts and credit cards since the couple is actually returning to their original lender and retained their accounts when they switched loans a year ago.
Louden’s timing is impeccable.
The big banks are raising rates but most of their competitors are not. Interest rates are low and cannot credibly fall much further, and the fees for breaking a home loan early are lower than ever, thanks to regulation.
All this means that now is the perfect time for homeowners to refinance, and possibly to fix a portion of their loan at the same time. Do it now, before the Christmas rush sets in and you’re watching New Year’s Eve fireworks before you know it.
By the end of this month, Commonwealth Bank, Westpac, ANZ and NAB will have all increased their standard variable rates by an average of 0.18 percentage points, to 5.61 per cent.
Figures from RateCity show on a Sydney or Melbourne-sized mortgage of $500,000 the rate hike will add $54 to monthly repayments, from $2820 to $2874 or an extra $648 a year.
But there’s no reason to meekly accept higher repayments.
Sally Tindall, the money editor at RateCity, says while attention is on the big banks raising their variable rates, a number of lenders have actually been dropping their rates for owner-occupiers.
There are more than 10 that have rates under 4 per cent for owner-occupiers, including Mortgage House, loans.com.au, Yellow Brick Road and the NAB-owned UBank. There is no reason why owner-occupiers should be paying more than 4.5 per cent, Tindall says. Taking action
There are many owner-occupiers who are in a position to win a lower interest rate with their lender if they try, says Taichi Hoshino, the chief executive of comparator website Monetise.
House prices have grown rapidly in Sydney and Melbourne, leaving homeowners with more leeway. Hoshino says, to be in a strong position to negotiate, homeowners would need to have at least 20 per cent equity in their house, which is where the loan amount is less than 80 per cent of the valuation.
They would also need to have a good credit history. And those with bigger mortgages are also more likely to be able to negotiate a discount.
Anyone with less than 20 per cent equity would not likely be switching mortgages because they would have pay lenders’ mortgage insurance. Threaten to leave
“Australian banks have relied on the apathy and laziness of their customers and know that most who threaten to leave do not follow through,” Hoshino says.
He says, if the lender will not budge borrowers should make some inquiries with lenders with lower rates. Banks tend to listen when the threat to leave is real and credible, Hoshino says.
Jonathan Lee, a mortgage broker in Melbourne with Mortgage Choice, says most homeowners should expect to receive a discount on their big bank standard variable rate of at least 1 percentage point.
However, there are costs to switching.
Lee says there is usually an establishment fee for a new mortgage of between $300 and $600, plus legal fees charged by the new lender of between $200 and $300.
There will also be a “discharge” fee (also called a “termination” or “settlement” fee) of about $350 paid to the old lender.
Lenders are not allowed to charge exit fees on loans taken out after June 30, 2011. If you are on a fixed-rate loan, you may need to pay a break fee, but the bank is only allowed to charge the true economic cost of discharging the loan.
Establishment fees waived
Borrowers should negotiate hard to have the establishment fees waived, Lee says.
Some lenders will offer rebates from time to time of more than a $1000 to for owner-occupiers to switch their mortgages to them, Lee says.
It is not as easy for investors to get a discount from their existing lenders as it is for owner-occupiers. Even so, investors stand to benefit from shopping around as well.
Fixed rates low
With the official cash rate at 2 per cent, interest rates can’t fall much further. This means there is little to lose by fixing a portion. If it goes up, you’ve made the right call; if it goes down, it won’t be by much.
Experts say the best time to move to a fixed rate is when there is talk of official interest rates falling, since anticipated rate rises are usually priced into any fixed rate offer.
Canstar figures show 3-year fixed rates are 4.52 per cent, on average. That is well below the average standard variable rates of the big banks of 5.61 per cent. It even beats the average basic variable rate, across all lenders, of 4.63 per cent.
Fixed-rate mortgages are much more flexible than they used to be. For example, almost all of the three-year mortgages on Canstar’s database allow extra repayments, and one in three have offset accounts, where the money sitting in the account is deducted from the mortgage balance.
Good brokers can help
Switching a mortgage can be daunting for many people but mortgage brokers can help with the legwork in finding a mortgage.
A good broker will have a spread of loans from various lenders, will ask questions about your personal circumstances and recommend more than one mortgage.
Be aware that brokers are paid commission by lenders and that can create biases to favour particular lenders.