When Mark and Sharon* decided they wanted better service from their lender, they didn’t realise they’d also be saving tens of thousands of dollars and shaving a decade off their loan by refinancing their mortgage.
“We were with our original lender for several years, but a lack of services compared to other providers and more frequent rate increases compared to other banks made us decide to move.
At the time we refinanced, we were on a 30-year mortgage of $340,000 at 4.5%. We refinanced to a 20-year mortgage at 3.75%. By paying an extra $293 per month, we are repaying $500 more principal per month, which means a projected saving about $136,000 in interest, and 10 years earlier.
Rates have recently dropped again, so we will certainly be looking at whether it’s viable for us to refinance in the near future. You do need to factor in fees and other penalties for moving your mortgage, so you can’t just jump ship with every rate change though. Either way, we are ultimately better off than where we started and learned the value of not doing a ‘set and forget’ with our mortgage! We will check in at least every two years to ensure we are still on the best deal.”
How we went about refinancing our mortgage
“Once we decided to refinance, we got stuck into researching our options and how other people had tackled it – we looked over the web, read the public forums (including Whirlpool.net.au, Ozbargain, and Reddit), then decided it would be best to contact a finance broker.
A broker can help you get prepared. They also helped us avoid a potential pitfall – the ‘honeymoon’ period. A few loans that stacked up really well against others lost out because the revert rates – the interest rate a loan reverts to after the initial introductory discount period – made them less competitive.
While refinancing with your bank is often promoted, from our research and experience, it seems hit and miss, and we weren’t offered the best rates available by negotiating with our lender. You also need to consider what services you need from your lender and what sweeteners they offer, such as cash backs for signing up with them and factor that into the total packaged saving.
We’ve discovered you don’t just get better rates, but also better service when you refinance – lenders know people do it, so it seemed to us they save their best offering for new loans. However, with house prices going down, wages stagnating, and even a possible financial downturn or recession coming, banks may be more risk aware than before, making refinancing difficult for many.
If you have the time, prepare your finances well in advance to starting the process. Be prepared to clean up your bank statements from any unwanted expenditure four to six months before you apply. Banks will now demand bank statements and credit card statements, and some will reject your application if they see high-risk problems or irresponsible spending – so consider using cash for discretionary spending and have a solid idea of your expenses – banks will not lend to you like there is no tomorrow and risk calculations are very tight now.
Also ask for everything offered in writing – we learned the hard way with our last lender when the verbal promise of an annual fee waiver for the life of loan was only honoured for the first year; they said our loan was too small to be eligible, despite being told by the teller we could have it.”
General tips to stay savvy when refinancing
Before you sign on any dotted lines, do your math carefully. There can be hidden costs and fees, and what suits one person may not suit another (for example, if you’re planning an early payout). Familiarise yourself – and compare across products:
- Ongoing fees – these are usually monthly or annual.
- Application charges – these can go as high as $800 per loan.
- Exit fees – pre-July 2011 products may incur an exit fee.
- Break costs – relevant to fixed home loans, you may incur a break fee if you borrowed at a higher rate than the current market as the lender paid more to borrow the funds they’ve lent you.
Words by Melanie Hearse
For more tips and advice, check out our advice on refinancing your home loan.
* Names have been changed. The couple featured are not eChoice customers. Fees and Charges, Terms and Conditions apply.