Move your mortgage: A step-by-step guide

CHANGING mortgages can be full of hidden traps but, with good research, it's worth the effort.

Moving mortgages is in the spotlight after banking reforms were announced / File

CHANGING mortgages can be full of hidden traps but, with good research, it's worth the effort, writes Anthony Keane.

Switching your mortgage to a new lender can be one of the best financial decisions you make but if you don't do your homework first, it can be a costly, pointless exercise.

Moving mortgages is back in the spotlight with banking reforms announced last week by the Federal Government.

A key part of these reforms banning exit fees on mortgages won't kick in until July next year, and will only apply to new loans. However, there's nothing to stop disgruntled or dissatisfied borrowers from examining whether it's worthwhile swapping lenders now.

It won't be the right move for everybody, but it's worth checking things out.

"It makes no sense to simply change your home loan for the sake of changing your home loan," Club Financial Services director Kerry Cleanthous says.

"Remember that not only interest rates will determine which loan is best suited to your needs," he says. "A large array of product features will need to be considered, such as repayment options, establishment fees and portability."

GREAT RATES

Interest rates are usually the main reason people want to switch, and with some lenders offering variable rates one percentage point (100 basis points in bank-speak) below the big four, there's plenty of scope for savings.

Variable home loan interest rates offered by the big four banks range from 7.67 per cent to 7.86 per cent, data from infochoice.com.au shows, while rates at smaller lenders start at 6.65 per cent.

Benefits from paying a lower interest rate can be offset by the costs of switching, such as exit fees, establishment fees on the new loan and other costs of refinancing.

RateCity chief executive Damian Smith says you would typically want the interest rate from the new lender to be at least 20 basis points below your existing lender to make the numbers stack up after refinancing charges.

This 20 basis point difference could save $11,530 over 25 years, Smith says.

"Be sure it's the right company you want to work with. Interest rates are the first thing people look at but they forget the intangibles. It's a relationship, not a date," he says.

TALK IS CHEAP

Researching home loan options is easy. Smith suggests starting with some loan comparisons online, which can quickly narrow the field.

"It's worth talking to a mortgage broker and it's well worth talking directly to the lenders you are most interested in," he says.

"Also talk to your current lender and give them a chance to match the deal. People will often be surprised at the willingness of lenders to match."

Cleanthous says it is vital to speak with an independent expert, such as a mortgage broker or finance consultant.

"It is always best to use the services of a specialist when dealing with your finances," he says.

"Remember, they do this all day, every day."

WORDS OF WARNING

Refinancing costs can vary widely, ranging from a few hundred dollars to several thousand dollars.

KeyInvest Lending Services chief executive Chris Burns says homeowners who are unaware of the penalties involved with refinancing may make an expensive mistake.

"The less customers have to pay in exit and start-up fees, the more potential there is to gain from switching a home loan," he says.

"Many people are unprepared for and in some cases cannot afford the fees involved with transferring your mortgage to another lender. It can add up to thousands of dollars.

"Depending on the mortgage institution, you may be charged a nominal settlement fee, a government mortgage discharge fee and an early exit fee, regardless of whether you are refinancing a fixed or variable rate loan.

"When applying for a new home loan with a different provider, you are also likely to be charged setup fees, including a government registration fee, an application fee and valuation fees ranging from $100 to $2000 depending on the product."

Burns says an average homeowner may be charged as much as $3000 when refinancing.

HONEYMOONS END

Some lenders might suck you in with a great initial offer that turns ordinary after a honeymoon period of six or 12 months. Make sure you know exactly what you are signing up for and, if uncertain, seek independent advice.

"It is essential to lift your focus beyond the honeymoon period and make sure you are familiar with any account fees and the ongoing interest rate to avoid surprises down the track," Burns says.

Some home loans come with features, such as an offset account, that may cost you extra. If you don't need such bells and whistles, it may be best to seek a cheaper, more basic loan. RateCity says a $15-a-month service fee on an offset account that you are not using will cost you $4500 over 25 years.

Smith says the whole refinancing process is likely to take a few weeks.

HEADACHE TIME

One of the biggest deterrents to people switching mortgage lenders is the hassle of having to change the details of many of their other direct debit and credit payments such as utility bills, wages, insurances and donations.

Smith says many borrowers are on package deals where their home loans make other accounts cheaper or free.

"If you leave the home loan, you may have to leave the other products and open them with the new lender," he says.

"Then you have to do all the direct debit stuff."

Banks are required by law to be helpful about this, at least to some degree.

"Your current bank is obliged to give you a list of direct debits and credits, and that makes it easier for you to do transfers," Smith says.

"They are not obliged to do the transfers for you but they do have to give you the list."

REGULAR REVIEWS

Whether or not you choose to move your mortgage, it's always wise to give it a check-up to make sure you are getting the best deal possible.

"Our advice is once a year, sit down and spend an hour or two and have a good look at it," Smith says.

"Everyone's going to be better off spending some time to find out whether it's worthwhile or not."

Cleanthous says your circumstances will change from time to time.

"A good finance consultant will review your home loan to ensure that, over time, you still have the most suitable home loan," he says.

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STEP-BY-STEP GUIDE

 1 HIT THE NET

The internet is a great research tool, and websites such as infochoice.com.au and ratecity.com.au let you quickly compare a wide range of lenders.

2 TALKING TIME

Speak to a mortgage broker, potential lenders and your current lender. Get as much information as you can.

3 CRUNCH THE NUMBERS

Work out if the new loan will save you money after taking into account refinancing costs. A mortgage adviser can help.

4 ONE LAST CHANCE

Give your existing lender a chance to match the best deal. This will give you the savings without the hassle of switching.

5 DECISION TIME

If your lender won't budge, don't be afraid to make the move. You owe them nothing.

6 NEW LOAN APPROVAL

You may receive conditional approval, subject to things such as a property valuation or lenders mortgage insurance, before getting formal approval.

7 MORTGAGE DOCUMENT

It's time to sign all the paperwork. Unfortunately this can't be avoided.

8 SETTLEMENT

The new lender and old lender settle the loan. The old lender will send you their final loan statement. The new one will send you contact details, account numbers and access codes.

9 UPDATE ACCOUNTS

You may need to transfer direct debits and credits to new accounts with your new lender. The law says the old lender has to give you a list of all these direct transfers.

10 IT NEVER ENDS

Review your home loan every year to make sure it's still the right one for you.

Sources: RateCity, Club Financial Services