Mortgage Revisited
Sydney Morning Herald
Wednesday June 9, 1999
Short-term pain may offer long-term gain.
Deciding whether or not to refinance a loan is almost as difficult as choosing a loan in the first place. There are
hundreds of products on offer and, to complicate things, there is the cost of discharging the mortgage with the current lender.
Like many people paying off their first home, Lynn and Ian are sitting on a large mortgage, wondering if they have chosen the right product.
They have a combined income of $76,000, and eventually chose a RAMS variable rate because it had no ongoing fees and "seemed more down-to-earth".
Just over a year ago, they started paying off their $187,200 mortgage on a 21/2-bedroom apartment in the eastern suburbs. Shortly after their first baby arrived in September, they fixed 70 per cent of the loan at 6.99 per cent and kept the rest at the variable rate.
"When interest rates went down again I was so annoyed," Lynn says. "But it's really hard to find out if moving lenders is worthwhile because everyone's got a vested interest."
Ian and Lynn discovered they would pay close to $2,500 in break costs and discharge fees to leave RAMS - and that's before any application fees and other charges by a new lender were paid. Adding the break costs to their remaining mortgage would give them a debt of $183,000 to repay with a new lender, on a home now worth about $225,000.
It would be an expensive move, but according to Tim Bolton, the principal partner in the Melbourne firm Mortgage Solutions Australia, many lenders will reduce application fees or mortgage insurance (if applicable) to make refinancing with them more attractive.
"If people end up in a more flexible product that they're more comfortable with, it might take two years to recover the cost of moving, but ... the long-term aspect is that you're saving more money," he says.
"I think it's a good time [to refinance]. Interest rates are the lowest they've been in a long time, and competition is very strong."
However, Cassandra Williams, an analyst with Cannex, is not convinced of the value of breaking a fixed-rate contract, unless you're getting "a particularly good deal". Anyone considering such a move, she says, should ask the prospective lender to provide a clear calculation of how much would be saved. And remember, variable interest rates can rise as well as fall, whereas fixed rates provide certainty.
Using Lynn and Ian's situation as a case study, three providers were asked to suggest one of their products, with a 25-year loan term (see box). Lynn and Ian could then compare these with their existing RAMS loan.
Lynn and Ian were particularly keen to consider an offset loan which one bank had suggested when they were originally weighing up their loan options.
The idea was that a 100 per cent offset loan would allow them to pool all their funds, including salaries, into a linked bank account and use the "interest" on this account to offset the interest on their home loan.
Despite their interest in an offset loan, Alex Sala, the chief executive of Endeavour Credit Union, says that with just under 20 per cent equity in the apartment, the couple have quite a large debt for their income, and servicing that debt relies on both incomes being maintained.
He recommends a product such as Endeavour's Essentials Home Loan, which he says is a "disciplined" loan, allowing them to reduce the principal over time and pay additional amounts.
He says the value of an offset loan is wasted if you don't have excess funds to obtain the offset interest.
A spokesman for ANZ says there is not one "best solution" for customers because every-one's circumstances are different.
He says that if Lynn and Ian expect to
have excess funds, then having an offset capacity on at least part of their loan would be of great value.
"On the other hand, if a rising rate environment would impose hardship - say, plans to have a second child and therefore reverting to one income - then a fixed-rate loan might be preferable," he says.
In addition, because the couple's debt would be slightly more than 80 per cent of the
value of the apartment, and therefore require mortgage insurance, he recommends they
find $3,000 to bridge the gap and save themselves that insurance.
Lynn and Ian's options
Super Members Home Loans
Standard Variable Loan
Interest rate: 5.9 per cent
Application fee: $0
Ongoing fees: $0
Fortnightly repayments: $650
Total interest paid: $108,205
Total repayments: $291,205
Mortgage insurance on refinancing: $237.90
Life of loan: 17 years, two months
ANZ Bank
Money Saver Home Loan
Application fee: $600
Ongoing fees: $8 a month
Fortnightly repayments: $642
Total interest paid: $109,033
Total repayments: $294,308.40
Mortgage insurance: $550
Life of loan: 17 years, 51/2 months
Endeavour Credit Union
Essentials Home Loan
Application fee: $600
Ongoing fees: $8 a month
Fortnightly repayments: $642
Total interest paid: $109,033
Total repayments: $294,308.40
Mortgage insurance: waived
Life of loan: 17 years, 51/2 months
RAMS
Split loan: 70 per cent fixed at 6.99 per cent for another two years, five months
30 per cent standard variable at 6.24 per cent
Ongoing fees: $0
Total interest paid: $125,154.49
Total repayments: $305,654.49
Life of loan: 18 years, 11/2 months
Break and termination charges if refinancing: about $2,500
* Calculations based on weekly repayments of $325, calculated fortnightly, on a 25-year loan of $183,000 (which includes $2,500 in break costs from RAMS, the current lender). RAMS loan is a 30-year loan, of which $180,500 remains to be repaid.
Refinancing figures supplied by Cannex. RAMS figures supplied by Mortgage Solutions Australia.
HOT TIP
If you're thinking of refinancing, ask other lenders what inducements they can offer, such as waiving establishment fees.
DEFINTIION
Break costs:
Cover the bank for what it will lose by relending your money at current interest rates.
© 1999 Sydney Morning Herald