With huge potential savings in switching to a cheaper loan, it’s no surprise more homeowners are refinancing. But those who don’t do their research or visit their mortgage broker first can find nasty surprises in higher fees, new deposit requirements and tougher credit conditions.
A borrower with a $600,000 mortgage paying 5 per cent could save $580 a month (or more than $208,000 over 30 years) by switching to a 3.84 interest rate. The switching costs would be recovered in two months.
The significant savings explain why refinancing has increased three-fold during the past 25 years to 30 per cent of loan approvals and reached “unprecedented levels” this year, says investment bank JP Morgan.
But the era of lenders reducing interest rates to increase market share is coming to an end as their revised goals are to build revenues, lower costs and increase capital to meet strict new regulatory requirements enforced by APRA.
Most lending institutions are already starting to tighten borrower conditions, increase house deposit requirements, insist on more evidence of regular income and making it harder than ever for borrowers to get an interest only loan.
Some lenders are offering rates of 3.54 per cent including online lenders that require the consumer to do the application themselves, these lenders don’t factor in any “outside the box” circumstances.
Cheapest is not always the best. It is important that consumers read the fine print to reveal any hidden fees and charges that may reduce benefits or savings.
The maximum rate on a basic residential mortgage rate on a principal and interest loan of $800,000 is 5.27 per cent, compared to a minimum of 3.55 per cent.
An investor considering the same loan could choose between a minimum of 3.79 per cent, or maximum of 5.85 per cent.
There are also differences between rates (and fees) for fixed loans.
The minimum for a five-year fixed rate is 3.8 per cent and maximum 5.49 per cent.
A borrower without 20 per cent equity in a property should think twice because they will likely be charged lenders mortgage insurance (LMI).
For example, a $700,000 property with $70,000 equity (10 per cent) could be liable for LMI premium of up to $17,000 which can either be capped onto the loan (borrowed) or is payable upfront by the consumer. This would not benefit the client to refinance.
Borrowers need to verify with their mortgage broker or lender about minimum deposits because many are being raised, particularly for inner-city and suburban high rises and apartment complexes. High rise apartments ie high density some lenders require up to a 30% deposit.
As a borrower with strong equity, you are a target customer for the lender. There is a significant difference between minimum and maximum loan rates, which means there is a lot of money to be saved by comparing your options and negotiating.