Cheaper loans probably exist

If you’re thinking about changing lenders to get a better deal, it can be worth approaching your current lender to see if you could get a rate reduction by switching to a cheaper, basic loan.
If you’re thinking about changing lenders to get a better deal, it can be worth approaching your current lender to see if you could get a rate reduction by switching to a cheaper, basic loan.

THE Reserve Bank may have kept the official cash rate on hold in February, but this didn't stop the big four banks increasing their home loan interest rates.

If you're one of the two million Australians who have a variable rate mortgage with a major bank, you won't be happy. But with a bit of effort, you could get a better deal on your loan.

There are plenty of comparatively cheap home loans available through smaller lenders. IMB for example, at the time of writing, offers a variable rate of 6.27%. eMoney is charging 6.28%, and MyRate has a variable rate loan costing 6.35%. By contrast, National Australia Bank charges 6.72% for its basic loan and even on a package loan, which offers an ongoing rate discount, you can still expect to pay 6.52% (loans over $250,000). These rate differences, while small - and if sustained, can provide savings worth thousands of dollars over the life of the loan.

If you're thinking about changing lenders to get a better deal, it can be worth approaching your current lender to see if you could get a rate reduction by switching to a cheaper, basic loan.

It's a sensible starting point because unless you have more than 20% equity in your home (the difference between the property's value and the loan balance), a new lender will ask you to take out lenders mortgage insurance (LMI). This applies even if you took out LMI when you first purchased the place because LMI is not portable between lenders.

If you haven't owned your home for long, you may not have much equity, and in this instance, LMI premiums can cost around 2% of the property's value. For many home owners it is this expense that sees them stick with their original lender.

You also need to consider if you'll be slugged with exit fees. These are no longer charged on loans taken out after 1 July 2011, but if you took out the loan up to five years earlier exit fees may apply. If you're not sure, pick up the phone and ask your lender.

Even if you can avoid LMI or exit fees, switching your loan will involve other refinancing costs. You need to budget for a mortgage discharge fee (around $250) and the cost of registering the new mortgage with your state or territory government (allow about $350). Depending on your lender you could also face loan application and valuation fees.

If everything stacks up so far, the next step is to hunt around for the loan you believe is right for you. A reputable mortgage broker can help here but be aware many of the cheapest lenders don't deal with brokers. Websites like www.ratecity.com.au and www.infochoice.com.au are handy to compare the rates charged by different lenders.

Another useful website is www.moneysmart.gov.au. It features additional information on what to do if you're thinking about switching loans, and has an online calculator that shows how much you could save by refinancing. The whole process can call for an investment of your time, but it can put money back in your wallet.

Paul Clitheroe is a founding director of financial planning firm ipac, chairman of the Australian Government Financial Literacy Board and chief commentator for Money magazine. Visit www.paulsmoney.com.au for more information.

Topics:  big banks, home loans, interest rate, mortgage, official cash rate, paul clitheroe, rba



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