Beware of costs before switching home loans
THINKING about shopping around for a new mortgage? Beware the costs lurking under the surface, experts warn.
BANK not passing on enough of an interest rate cut? Thinking about shopping around for a new mortgage?
While switching mortgages for a better deal might look good on the surface, some financial institutions have "hidden'' fees and charges that discourage switching, says Wayne Duffin, Club Loans Mortgage professional at The Investors Club.
He says that when thinking of making a mortgage change, your first port of call should be with your current lender.
"You might find there is no need to switch as many lenders are open to negotiation and, once adjusted, your rate is competitive,'' Mr Duffin says.
Mortgage Choice spokeswoman Belinda Williamson says interest rate changes encourage mortgagees to shop around.
"It certainly gets borrowers thinking about their options and looking at the option of refinancing,'' she says.
Apart from lower interest rates, advantages such as offset accounts, which allow savings to offset the interest on the home loan, are sometimes available.
However, homework is required before diving into the next mortgage. Some things to watch for include:
Mortgage insurance: New lenders may require a new valuation on the property. If its value has gone down and the amount owed is more than 80 per cent of the valuation, mortgage insurance of 2 per cent of the value may be payable.
"Ask your broker for an upfront valuation before proceeding with your refinancing application,'' Mr Duffin says.
Deferred establishment (exit) fees: Mr Duffin says that from tomorrow the fees are no longer applied to new loans but can still be charged on older loans for the first five years.
"The amount payable varies according to the total loan amount and how long you have held the loan,'' he says.
Mortgage discharge fees: These cover the lender's administration costs and are different to exit fees - and an older loan could incur both exit and discharge fees.
Mr Duffin says the fees could be up to $500 and, with government charges, it would usually cost about $1000.
Break costs for fixed-rate loans: This is charged when the mortgagee doesn't fulfil the agreed terms of the contract - paying the mortgage at the set rate for the set time.
Direct debits: New legislation takes effect in the coming month to make it easier to change all your direct debits, Mr Duffin says. You should avoid being overdrawn or cheque dishonour fees as you need to update all your banking details.
Application fees: Ranging from $400 to $750 to apply and up to $140 to register the mortgage.