Exit Fee Ban to Go Ahead, But More Can Be Done to Increase Lending Competition

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• Senate allows exit fee ban to go ahead from July 1, 2011 • Many borrowers still hit with high switching costs including lenders mortgage insurance • Top tips: how borrowers can save on switching their home loan

Australia’s best financial comparison website RateCity (http://www.ratecity.com.au) has welcomed the decision by the Senate yesterday (June 22, 2011) to keep the banning of early exit variable mortgage fees in place from July 1, 2011.

Damian Smith, RateCity’s CEO, said that while abolishing early exit fees would help some borrowers switch to better deals without being penalised, more can be done to improve other heavy costs associated with switching mortgages.

“Banning early exit fees on variable home loans will not impact the entire mortgage market because there are other fees and charges which will deter many borrowers from switching. The most significant cost of switching lenders for many borrowers is Lenders Mortgage Insurance (LMI),” said Mr Smith.

“All lenders charge LMI if you want to borrow 80 percent or more of the value of the property. It covers the lender – not the borrower – in case you default on your mortgage. The problem with LMI is that if you switch to another lender the LMI policy is cancelled and you’ll have to pay for a new policy with your new lender, which can be very costly.

“For instance, for a $300,000 property and a 10 percent deposit, borrowing $270,000 would incur LMI costs of about $4,500. And the more you borrow, the greater the cost as a $600,000 property with a 10 percent deposit would mean an LMI fee of about $17,500.

“There are two major LMI providers in Australia – QBE and Genworth Financial. So there’s a big chance you’re paying for same policy, for the same property, to the same insurance provider!

“Whether it’s added to the loan balance or paid up front, these costs can outweigh the value in switching lenders,” he said.

Mr Smith said banning early exit fees on variable home loans was a step in the right direction towards improved competition in the home loan market.

“The banning of early exit fees for new variable home loans from July 1 will see one less barrier for borrowers to hit if they’re not happy with their mortgage or lender. While we won’t necessarily see the real impact of the exit fee ban until 2012, it will no doubt open the door for more borrowers to be able to switch if they choose to,” he said.

“When more borrowers are switching lenders and refinancing their mortgages, this will drive lenders to compete harder to retain their customers and attract new ones.”

Mr Smith’s tips on switching home loans:

  •     Compare home loans online using financial comparison websites: this can help you get a quick snapshot of the home loan market – which lenders are offering the best deals and what the repayments will be. Use comparison rates rather than the advertised rates to determine the real cost of the loan because the comparison rate takes into account any ongoing fees and averages out the rate over the loan term.
  •     Find out the costs of switching: including exiting your current home loan and upfront costs for your new loan. Ask your lender if there are any hidden fees and what the total cost will be if you break your loan contract. Remember that fixed or introductory rate home loans will still incur “break costs”.
  •     Calculate if it’s worth the switch: you’ll need to find a home loan with an interest rate that’s at least 20 basis points better than what you’re currently paying. For instance, if your current mortgage is $300,000 at 7.2 percent you’re paying about $2,159 per month in repayments. If you switched to a loan charging 7.0 percent it would take just over four years to recoup a $2,000 cost of switching but with a 25-year term you would potentially end up saving about $10,000.
  •     Ask your lender for a better deal: it’s also worth talking to your lender to find out if they can offer you a better deal because most lenders have said they’re willing to negotiate to keep their customers.

RateCity’s top variable home loans and their advertised rates, as at June 23, 2011
1.    Loans.com.au, Dream Loan Express – 6.58%
2.    Better Options Home Loans, Advantage Plus Variable <$2m – 6.59%
3.    Mortgage Port Management, Essential – 6.69%
4.    eMoney, Full Doc Variable Pro Pack – 6.71%
5.    Collins Home Loans, Variable – 6.72%

About RateCity
RateCity is Australia’s best financial comparison website, where Australians can easily search, compare and apply for over 13,000 financial products – from credit cards to home loans to car insurance – from over 250 institutions. Our job is to take the hassle out of finding the right financial products online – saving our users both money and time.

RateCity is a private company with an AFS Licence (AFSL: 316 710), powered by CANSTAR CANNEX, in partnership with ninemsn.

Disclaimer
To the extent that any RateCity Pty Limited data, ratings or commentary constitutes general advice, this advice has been prepared by RateCity Pty Limited ABN 12 122 743 542 AFSL 316710 and does not take into account your individual investment objectives, financial circumstances or needs. Information provided on and available from this site does not constitute financial, taxation or other professional advice and should not be relied upon as such. RateCity Pty Limited recommends that, before you make any financial decision, you seek professional advice from a suitably qualified adviser.

Product Disclosure Statement relating to the product should also be obtained and considered before any decision about whether to acquire the product.
Please refer to RateCity's FSG for more information.

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Michelle Hutchison
RateCity
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