Swimming With Sharks
Sydney Morning Herald
Wednesday October 4, 2000
Not happy with your current financial institution? Thinking about refinancing your mortgage or consolidating your loans? It might be easier than you think. By understanding your banking and lifestyle needs and wising up on all the usual fees and charges - the hidden costs you don't hear about until it's too late - you may be able to swim in the water with the loan sharks and not get eaten.
The first hurdle you will face is whether by shortening the life of your existing mortgage you incur a pre-payment penalty. If your home loan is currently fixed rate you will generally be up for the equivalent of three months' interest, depending on the current life of the mortgage.
It is probably to your advantage to see out
the fixed period because your interest rate is presumably lower than the current variable.
Usually with the standard variable rate you will not incur a
pre-payment penalty except if it is a discounted rate and you repay within the first four years. For example, Colonial State Bank has a discounted Rate Saver Loan option for one or three years and the pre-payment penalty is $600 within the first three years and $300 following. This penalty can also be called a deferred establishment fee.
Until recently, ING Mercantile Mutual Bank was waiving its usual application fee for its Home Loan Saver but you incur this deferred establishment fee if you repay within one ($800) to four years (scaling down to $200).
Some lenders impose a discharge fee at the close of a loan to cover administrative costs. For example, with the basic Wizard Direct home loan there is a $500 discharge fee; with all St George home loans, the fee is $250.
Once you have discovered how much it will cost you to bail out of your mortgage, it's time to go shopping among the competition. To apply for a home loan you can be charged a separate application and approval fee (also called a settlement fee), or they both may be included in an establishment fee.
Each financial institution has its own terminology, so make sure you question what
each fee entails and find out if there are more. Lenders from time to time will waive or discount establishment fees to win customers. You may also be eligible for discounts of this fee according to how many of the institution's financial products you sign up for, such as opening a savings account or taking out insurance.
You may find that refinancing involves further legal costs that are either not covered by the establishment fee or, if that is waived, you still incur. These can add up to $400.
Consolidating loans is easy when you refinance, irrespective of the purposes of the original loans. Financial institutions use a loan-to-value ratio (LVR) to work out how much they are willing to lend.
Most banks will lend at least 85 per cent on the equity of your home (St George). Westpac and Wizard will lend 90 per cent and Colonial and Commonwealth 95 per cent. To gain approval, you may need to pay about $150 for a property valuation and the lenders may want to see your previous loan statements to ascertain risk.
There are often ongoing account-keeping fees, especially with the larger institutions, usually $8 a month. But the most important figure to check out, of course, is the interest rate. Ultimately, this ongoing and volatile expense must be weighed up against all other costs to determine whether you will refinance and with whom.
Weigh up also the facilities your new loan will provide and their related costs. For example, individual loans may have a redraw facility but you may have to pay to access it and there may be delays. Generally, the lower the interest rate, the more basic the loan facilities.
Competition is rife and the loan sharks are vying for your custom. Get them to be upfront about all charges and assess your own lifestyle needs, and you will have them eating out of your hands.
© 2000 Sydney Morning Herald