What to look out for when switching loans

SWITCHING loans without doing your homework could end up costing you more in the long run. Here's a checklist of what to look for.

What to look out for when switching loans

CHANGING lenders could soon be as easy as changing your socks.

With interest rates rising, the Rudd Government says consumers should be able to switch to better home loan deals without being slugged with high entry and exit fees, which can run into the thousands of dollars.

Banks will also be required to do some of the heavy lifting by helping customers set up accounts with other providers.

While it's a step towards greater flexibility for borrowers, does it mean you should say adios to your lender?

Lisa Montgomery from Resi Mortgage Corporation says while there are benefits in refinancing, whether it be to get a better rate, better service or to simply take some of the pressure off if you're struggling to meet repayments, switching loans without doing your homework could end up costing you more in the long run.

"For anybody who's looking to change their loan, you still need to take note of all the fees to get out of your existing loan, all the fees to get into your new one and ask what value is (switching) going to bring to your overall financial situation,'' she says.

"It's not just about interest rate. Certainly interest rate is important, but saving 0.25 of a per cent won't even matter if you have a lender that's looking after you and putting strategies in place to help you pay off your loan quickly and save money in other areas beside your mortgage.''

The risk of people getting "churned'', or encouraged to change lenders even if the loan isn't appropriate, is another issue to be wary of once the barriers to switching come down.

"With any kind of third party offering advice, such as mortgage brokers who are generally not regulated, they do enjoy certain advantages like trailing commissions on any advice or new loans you take out,'' says Christopher Zinn, a spokesman for consumer lobby group Choice.

"Again, you have to look carefully, get full disclosure from them and see whose interests are paramount in this brokerage -  yours or theirs.'' But he says, in general, making account switching easier will put pressure on the banks to lift their game.

"Moving bank just because there's a 0.1 percentage difference in your home loan might not always be the best advice, but we feel there should at least be parity in Australia with what happens overseas,'' he says.

"In comparable countries - such as NZ, the UK and Canada - Australia is at the top of the list for (most expensive) entry and exit fees.

"The best explanation we can find for that is there's greater competition and switching between the financial institutions in those countries. They really have to screw down their fees and charges so that they can be attractive to new business.''

While he is hopeful Australians will soon enjoy the same benefits, Mr Zinn says borrowers will still need to be on their toes.

"The (banks) will incur greater costs as a result of this and either there are efficiency or productivity gains which flow from that or they will just ramp up fees and charges on other things, which people generally don't pay enough attention to.''

He says consumers who flocked to the Commonwealth Bank last month because it made the smallest independent increase in its variable mortgage rate have been hit with a further 25 basis points hike after the official Reserve Bank rise.

"Undoubtedly there were people who did switch in that period - all for nothing really because the bank didn't maintain its position,'' he says.

Which is why it's important not to be solely interest-rate fixated when considering changing lender.
Mark Edwards from My Mortgage Planner says many people forget some of the biggest costs are government charges.

"Each time a person enters into a mortgage, even if it is only a simple refinancing, stamp duty and government statutory charges are paid,'' he says.

"If borrowers are spooked into changing lenders every time there is an interest rate increase, the only beneficiary is going to be the state governments who will enjoy the windfall caused by an artificial churn.''

Refinancing pros and cons

Good reasons
* If your interest rate is not competitive and you are unhappy with other aspects of your loan
* If managing your loan on a daily basis is a challenge -- even making repayments is a chore
* If you have not established a solid relationship of trust with your lender
* If you have never been offered ideas on how to pay less interest and pay your loan off sooner

Bad reasons
* Knee-jerk reaction to fluctuating interest rates without doing your homework
* Jumping ship based entirely on interest rate
* If someone offers you a deal too good to be true
* If the exit fee on your loan exceeds the financial value of changing loans

Checklist
* Work out what your current loan is costing you
* Make a note of features you want in a home loan
* Look at alternative home loans (at least three) that give you the features you want and work out how much these loans would cost you
* Consider any entry and exit fees
* Talk to financial institutions, including your current provider, to find the best deal they will offer.
* Decide whether you will be better off by switching lenders, switching products or staying put