Time to fix the mortgage?
With interest rates held at an all time low is now a good time to fix your mortgage? John Collett weighs the pros and cons.
Are you the "ideal" mortgage borrower? If, so, lenders want your business and for those who make the effort there are plenty of mortgages with interest rates under 4 per cent.
An ideal borrower is someone with at least 20 per cent equity in their property and a good credit record.
Some of the sharpest deals, with interest rates well below 4 per cent, are available to those with even higher equity in their property, of at least 30 per cent.
Lenders are luring borrowers not only with lower interest rates, but also sweeteners such as frequent flyer points and cashbacks.
However, the lower rates and sweeteners are for new customers only.
That can feel like a slap in the face for loyal customers, says Sally Tindall, money editor at ratecity.com.au. But existing customers don't have to cop it.
"If you are a long-standing customer, find out what rate your lender is offering new customers, because if it's different, you've just got yourself a bargaining chip," she says.
Chris Reid and his wife Kathryn were not interested in trying to bargain with their big bank lender when they upgraded their house last year.
The couple, who run a pet sitting and dog walking business in Brisbane and have a two-year-old son, decided their big bank's mortgage interest rates were too expensive and they could do better elsewhere as they have a decent amount of equity in their property.
Chris looked around at what was available with property magazines and online comparison sites. They went with a variable rate of 4.02 per cent from loans.com.au; an online-only lender owned by Firstmac.
Their interest rate has subsequently increased to 4.27 per cent, but the "interest rate is cheap and there are no silly fees", Chris says.
"The actual loan approval processs was really good and done all online and over the phone," Chris says.
"I have friends who tell me they face queues when dealing with the some of the big lenders and that's not for me," he says.
While the deals on offer sound enticing, Tindall says borrowers should be sceptical about special discounts that only last for one year on a 30-year mortgage.
"They are introductory offers that are designed as a marketing tool to attract new customers, not retain existing ones.
"While these rates can often be good deals, it is important to read the fine print, particularly if they are only for a limited time because you may find that the rate jumps up dramatically after the honeymoon period is over," Tindall says.
There are also the costs of refinancing to consider.
There is usually an establishment fee for a new mortgage that is typically about $600 and then there will be legal costs of a couple of hundred dollars.
However, some lenders do not have establishment fees and those that do will sometimes waive them if the new borrower is prepared to negotiate, Tindall says.
Be aware there will also be a discharge fee that can go by a variety of names, including settlement and termination fees, that is paid to the old lender and is usually a few hundred of dollars.
The big banks raised their mortgage interest rates in October last year pretty much across the board to all types of mortgage borrowers, despite no change in the official cash rate.
They did that in response to tighter lending standards imposed by the regulator. It was partly to keep in step with with global trends for lenders to hold more capital against their loans.
Some smaller lenders also increased their rates, but many others have actually dropped their rates since the middle of last year.
There are more than 10 with variable rates under 4 per cent for owner-occupiers, including Reduce Home Loans, Mortgage House, Homestar Finance, Pacific Mortgage Group, and Freedom Lend.
Some of these low rates are only available to those borrowers with deposits or equity in their properties of more than 30 per cent of the value of the property.
While securing a mortgage with a competitive interest rate is the single best way to pay off the mortgage earlier, there are other things that borrowers can do to save on interest.
Offset accounts are one of the best ways to save interest, says Philip Sangster, a mortgage broker with Mortgage Choice.
Offset accounts are transaction accounts linked to the mortgage.
The balance in the offset account is deducted from the balance owing on the mortgage for the purpose of calculating the interest payments.
Sangster says the best way to use an offset account is to have pay go straight into the account and to withdraw the money as needed.
An even better strategy for those who are well disciplined is to have a credit card attached to the offset account and to run everyday expenditure through the credit card, Sangster says.
By using the interest-free period on the credit card more money can stay in the offset account, further reducing the interest costs of the mortgage.
Care must be taken to make sure that the credit card is paid off by the due date to avoid interest, Sangster says.
Another strategy for saving on interest is to pay more than the minimum repayment.
The strategy is even more powerful now rates are so low, says Justine Davies, finance editor at Canstar.
"As there are no tax benefits attached to the loan on your primary place of residence, the interest you are paying is simply money down the drain," Davies says.
Davies provides an example of a $450,000 mortgage with 4 per cent interest over 30 years on which the monthly repayment is $2148. Including interest, the total paid by the borrower on the mortgage over 30 years is about $773,000.
Paying an extra $200 per month off the mortgage reduces the life of the loan by four and a half years and cuts $54,000 from interest costs.
Paying more than the minimum also makes it easier when interest rates eventually rise, Davies says.
Using the same example, if the interest rate was to rise 0.75 percentage points the $200 per month extra would still meet the new required minimum.
While lending criteria have been tightened across the board, it is investors who are being hit hardest.
Figures from RateCity shows investors are paying a margin of 0.34 percentage points more than owner-occupiers, on average.
About 60 per cent of lenders have "differential" pricing for investors, including all the major banks.
In addition to tighter lending criteria, investors face uncertainty over the future of negative gearing.
This is where the interest on the mortgage and other expenses exceeds the rental income received and the loss is claimed as a tax deduction against the investor's salary.
Negative gearing costs the federal budget $4 billion each year in lost tax revenue. If Labor wins the federal election, negative gearing will be allowed on new properties only, not existing ones.
Labor's changes to negative gearing would leave existing investors unaffected.
The Turnbull government has not reached its final position on negative gearing.
One proposal believed to be under consideration is to limit the dollar value of losses that can be deducted.
Fixed or variable
Fixed rate mortgages are low. With the official cash rate at 2 per cent you would not expect variable mortgage rates to drop much further.
However, it is expected the cash rate will likely be higher in three years' time. That means there is likely more to gain by fixing at least a portion of the mortgage.
Figures from RateCity show three-year fixed rates are 4.39 per cent, on average.
That is below the average standard variable rate, across all lenders, of 4.72 per cent.
Most owner-occupiers with decent equity and a good credit record should be able to get a discount on their lenders' standard variable rate, Tindall says.
Lenders adjust their fixed rates in anticipation of movements in the cash rate, their cost of funding and on their competitive positioning.
Tindall says lenders' funding costs are on the rise and that could could mean fixed rates will rise.
Borrowers do not have to fix all of their mortgage. By fixing 50 per cent of the mortgage the borrower is never going to be more than half wrong, Tindall says.
Fixing is not for everyone. They usually have fewer features than variable rate mortgages. For example, not all fixed-rate mortgages have offset accounts.
Also, early repayment of a fixed-rate mortgage can incur costs for the lender, which are paid by the borrower.
Finding a mortgage can be difficult for those with impaired credit records, for the self employed and for those who work irregular hours.
Self employment is much less of problem with than it used to be, given so many people now work for themselves, says Philip Sangster, a mortgage broker with Mortgage Choice.
He says the self employed need to provide their last two tax returns as evidence of income; so it is important to make sure that tax returns are always up to date
As for credit impairment, it could be a simple mistake like moving house and not informing the utility provider with final bill not paid.
Lenders tend to look leniently upon a default of impaired credit report that is the result of a simple mistake, Sangster says.
Experienced mortgage brokers can help as they are used to dealing with lenders and will often know how to satisfy lender concerns.
As to what to look for in a mortgage broker, those who are part of a larger franchise are likely to have more lenders on their panels.
The Australian Securities and Investments Commission (ASIC) says different lenders can pay different commission levels.
"This can potentially influence what loans the broker recommends to you and sometimes a broker will charge you a fee directly , instead of, or in addition to, the credit provider's commission," ASIC says.
It is probably best to use a broker who is paid the same levels of commissions from each lender.
Mortgage Choice franchises earn the same commission rate regardless of the lender or mortgage.
ASIC recommends that consumers should always get a written agreement from a broker.
It should show the type of loan being arranged for you, the amount of the loan, the term of the loan, the interest rate and any fees.
The fees could include broker's fees or commissions, fees to the credit provider or lender for setting up the loan, and any early termination fees.
ASIC also says, never sign blank forms or leave details for the broker to fill in later.
- SMH, Money