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How to give your mortgage a makeover

Photo: Louie DouvisThe Dwyer family, see case study below “A bit of certainty’.

Bank wars and government crackdowns on lenders make these exciting times for home loan customers. Lenders are being kept on their toes as banks, credit unions and building societies fight for market share, and there are great rates and innovative loans on offer.

It’s also easier to switch loans.

Official pressure on lenders now makes it less costly for mortgage customers to pursue a better deal.

From July 1, 2011 exit fees were abolished on new loans, and lenders who try to levy punitive charges on customers wanting to leave existing loans are under notice that they’ll be taken to task by the official watchdog, the Australian Securities and Investments Commission.

Credit unions and building societies (CUBS) were already giving the banks a run for their money but NAB’s “break-up” with the others in the big four has taken competition to a new level.

There’s now no excuse for complacency. As Melissa Dwyer, one of our case studies, points out, it can be worth your while to do some research on how you can negotiate a cheaper mortgage rate.

Melissa was offered a rate reduction when she approached her lender but is thrilled she switched instead to a fixed-rate, more flexible, loan with a building society.

“The discount we were offered at our old lender would have been eaten up by the next rate rise,” Melissa says.

“They weren’t going to offer us anything meaningful just for being great customers – we got a much better deal going elsewhere.”

To help you get started we asked research house InfoChoice to do the numbers on three different types of loan (three-year fixed rate, standard variable and an interest-only basic variable) to find how much could be saved on an average mortgage, Australia-wide.

Based on Australian Bureau of Statistics figures on debt on owner-occupier loans, InfoChoice puts the average loan at $285,000. If you live in a capital city it’s likely to be much bigger, so we did the same numbers for $570,000 – double the average.

Using the standard home loan rate for all the big four banks as our base, InfoChoice picked the top three loans in the three categories to show how much money you could save over a 25-year term. The results are astounding: If your standard variable loan matches the average and you’re paying big four rates, you’d save almost $50,000 by switching. If your loan is double the average, the savings would be just over $103,000.

If you’re an investor with a mortgage of about $285,000 and you’re paying big bank rates, would a potential saving of $21,765 be enough to make you shop around? Take that saving to $46,525 for a $570,000 loan.

If certainty is your thing and you have a $285,000-ish fixed-rate loan, how does a saving of $39,000 sound, or just over $76,000 for the bigger loan?

Leaving costs

With all the publicity about exit fees being banned, there’s been some confusion about the costs home loan customers face when leaving one lender for another with a better deal. The situation is simple for loans taken out from July 1, 2011: all exit fees will be banned. For existing loans, though, if you took out your loan less than five years ago you’ll probably have to pay an early exit penalty.

This penalty is most likely to apply if you were charged low or no establishment costs. Some lenders waive or reduce these to woo you but make up for it with extra costs if you leave within the first five years.

So brace yourself for some higher costs but be reassured that ASIC has in place penalties for lenders if they charge “unconscionable” fees that are above their actual loss.

If your mortgage is more than five years old, you’ll still have to pay other leaving expenses. Lenders may levy a mortgage discharge fee – credit unions and building societies usually charge nothing but some banks want up to $750. Many lenders require settlement fees of about $200 to $250.

Even among the banks that recently trumpeted they were cutting exit fees, these two leaving costs can total $250 to $350.

Better rates

Securing a lower rate is all-important. On the average $285,000 loan, a standard variable loan that’s 0.5 of a percentage point lower can mean a $50,000 saving over 25 years.

You’ll never be stuck with the advertised variable rate if you realise your leverage. If you borrow more than $500,000 you’re likely to be able to negotiate a better rate, Canstar Cannex analyst Mitch Watson says.

Broker John Manciameli of Mortgage Choice says home loan packages (where you bundle your mortgage, credit card and other banking products) can cut rates by about 0.7 of a percentage point. These used to be called professional packages but are now more widely offered, not only by banks but by building societies and credit unions as well.

Even owning bank shares can earn you discounts. At Bank of Queensland, for example, if you own at least 500 shares you can get the same sort of discounts (and higher rates on deposits) under its shareholder benefits package.

Maximise options

Once you’ve nailed down the best rate, make sure you’re making the most of the ways to pay off your loan faster – such as paying more each month, paying fortnightly rather than monthly, and using the features that come with your home loan.

Let’s take the mortgage offset account as an example. The clever way to use this sort of account, says Smartline mortgage adviser Ian Simpson, is to have your salary paid into the offset account then pay all expenses with your credit card – clearing the card each month once your salary is deposited.

That way, the interest paid on your salary deposit offsets the interest on your home loan. You just have to be disciplined about paying your card off in full each month.

Simpson says that, on a $500,000 mortgage over 30 years, having $5000 permanently in the offset account would mean you pay off the loan almost a full year early and save just over $35,000 in interest.

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