The Cost Of Opting Out
Sydney Morning Herald
Tuesday July 9, 1996
IF YOU fancy turning in your home or investment loan and taking advantage of the raging mortgage war, be sure to check the out clauses in your new loan contract.
Almost as fast as rates are coming down, exit penalties on home and investment loans are going up.
Exit penalties can be particularly savage if you opt for a special low "introductory" or "honeymoon" rate at the start of your loan. While many borrowers are unaware of it, special exit penalties apply when these rates are taken - sometimes above the exit penalties applying on a standard variable rate loan.
Almost all the major borrowers have some form of exit penalty on their loan products, and this can cost big dollars if you decide you want out.
One borrower reports he was offered an attractive honeymoon rate when he purchased a home but the loan had an early repayment penalty of three months' interest calculated on the original loan balance for discharge under two years, with lesser penalties up to five years.
He rejected the loan but had to fight hard to get his loan application fee back.
Data from the interest rate research group Cannex shows a wide range of exit penalties for customers accepting honeymoon rates, ranging from fixed dollar amounts to one or three months' interest to the differential between the standard and introductory interest rates.
The irony is that honeymoon rates were at least partly devised to encourage borrowers to refinance their loans, the idea being that the lower initial rate offsets some of the buying costs for new owners or the refinancing costs for existing borrowers. In return for that initial low rate, the banks are asking borrowers for their loyalty for at least as long as it takes them to recoup lost profits from the lower rate.
The more onerous exit penalties are those that apply to the original loan amount. This means a borrower who borrowed $100,000 with a 3 per cent penalty clause could be up for $3,000 if he wanted to refinance within the penalty period - even if he had made extra repayments and reduced his outstanding loan to well below the original $100,000 level.
One lending institution has a flat $500 penalty, but the majority operate on one or three months' interest as a penalty payment. The interest charged will be the rate applying at the time the loan is cancelled. Because this rate may not be as low as current interest rates, it may pay to shop around.
While several - but not all - of the mortgage originators charge exit penalties on their loans, the lack of use by these lenders of honeymoon rates means the penalty that applies is normally that relating to the standard loan.
© 1996 Sydney Morning Herald