"Very few homeowners refinance their mortgage out of sheer complacency – and it's costing them thousands of dollars every year," says Glenn Maynard, Managing Director of The Mortgage Store.
And, says Maynard, many lenders count on this complacency from homeowners.
"Many lenders use a marketing philosophy called the 'four hook principle'. If they have four or more of your accounts it is highly unlikely that you will take your business elsewhere - the perceived effort to do so outweighs the benefits," he said.
Maynard estimates that less than 10% of homeowners would review their mortgages on a regular basis, and those that do are usually purchasing a new property.
"When people apply for a new mortgage, they'll review their existing loans at the same time, but it's not something that people go out of their way to do. There's a perception that changing lenders is costly and too complicated," he said.
According to The Mortgage Store, changing lenders is simple – it can cost as little as $1,000 and takes only four weeks to process – but research is the key.
"Before changing loans, homeowners need to research discharge costs from their current loan and entry costs with the new lender. By comparing these costs to the short and long term savings, and working out how long it will take to recoup the initial outlay, homeowners are better equipped to make decisions.
The larger the loan, says Maynard, the quicker the outlay is recovered – a recent client of The Mortgage Store with a $1,000,000 mortgage recovered an outlay of $7,000 in just six months. (Jacquie – need to check figure with Glenn!!)
"Homeowners should also think of their loan in terms of dollar cost not interest rate - if you find a loan that is 0.5% cheaper than the one you're on, what does this mean? If you work out that 0.5% meant a saving of $1,113 per year then it makes better sense.*
Maynard also says there is more to choosing a loan than repayments as product features must also be considered.
"Choosing the right loan is always a balance between price and product. Features such as a 100% off-set account can help accelerate the repayment of your loan," he said.
The Mortgage Store also recommends homeowners maintain their current loan repayments on their new loan, even though refinancing has resulted in lower repayments.
"When you refinance, savings are greatly increased if you maintain your previous, higher loan repayments on the new loan.
"Whenever you pay more than your minimum payment on a variable rate, the additional payments reduce the principal. Therefore you repay your loan faster, saving thousands of dollars over the loan term, Mr Maynard said.
For example, the repayment on a loan of $300,000 @ 6.5% over 25 years is $2026/month. $300,000 at 6% over 25 years is $1933/month. If you keep paying $2026/month on the 6% loan you would repay your loan approximately 2 ½ years faster and save $57054 after tax.
"Buying a home doesn't end at settlement and loans need to be reviewed on a regular basis. Doing the research yourself or engaging a mortgage broker such as The Mortgage Store to do it for you will ensure you don't throw thousands of dollars out the window," Mr Maynard said.
Maynard says a broker can gain an understanding of a client's circumstances and provide advice on what options are available in a 10-15 minute telephone call - "it doesn't take hours".
Tips from The Mortgage Store:
- Re-visit your home loan on a yearly basis to make sure you are getting the best deal
- Always compare your loan in dollars not in interest rates
- Manage your debt like you would an investment - how often do you check the performance of your investments? If you were guaranteed a better performance from one investment over another – would you change?
- People with equity in property, who carry high interest rate debts such as credit cards, personal loans, leases, overdrafts etc, should consolidate these debts against the property. This would result in much lower interest rates over a longer term and lessen the cash flow burden.
- Remember that you prepay your home loan from after tax dollars. For those in the top tax bracket (48%), to save $1 you need to earn $1.92. This needs to be considered when looking at what you can save in your loan repayments. For example a saving of $1,113 net, equates to $2,140 p.a. from your gross income.
- You don't need to stay with the same institution and build a 'credit history' with them. All lenders use specific credit criteria that does not prejudice against new clients nor necessarily favour existing clients.
- Quite often You can change to better-priced products with your existing lender - they will not contact you so you must take charge of your own finances.
We can help you work out what your refinancing savings could be.
KB: Q0020
Last Updated: 26 Sep 2006
