Some simple steps to get the upper hand
by Michael Lee - Click to download published article
Mortgage refinance guide was published in Your Investment Property in May 2008. In the first half of this year, lenders and the Reserve Bank combined to sharply increase the cost of money. Forecasters suggest an overall movement of 1% p.a. or more this year is not only possible, but likely. With a hot start to the year, the remaining months are shaping up to be very exciting. Many people are reflecting on how the new credit environment affects them and what the next step should be.
For the first time in a few years, lenders across the board have significant variation in their benchmark rate (standard variable). Although not openly advertised, the level of discounting below standard variable also varies wildly. A loan that might have been highly competitive only a year or so ago could now be dull, overpriced and costing you money. (see Table 1 below)
As an investor, optimising your Return On Investment (ROI) and preparing for what might lay ahead are high on your list of things to do. If you are leveraging assets through finance, now is a very good time to revisit your loans to review your cost of money; release cash to take advantage of future bargains, or implement defensive strategies for bumpy times ahead.
As the market slows, lenders have become more aggressive in winning market share and you, the borrower can be the winner.
Lender |
Interest Rate
October 2007 |
Interest Rate
February 2008 |
Change |
Annual Cost impact on $300,000 |
AMP Bank Basic |
7.62% |
8.22% |
0.6% |
$1,800 |
BankWest Lite |
7.65% |
8.43% |
0.78% |
$2,340 |
Citibank Basic |
7.49% |
8.44% |
0.95% |
$2,850 |
Table 1 - What happened to three market leading basic products rates between October 2007 and February 2008.
Making the most of your position.
You can health check your current mortgages with just a small amount of planning and investment of time. You can then decide whether you are able to take advantage of the new level of competition and whether it is worthwhile refinancing to new solutions. The trick to saving time and simplifying the comparison process is to spend a few hours getting organised. Here’s how:
Take a view.
In the absence of official data, industry watchers such as Infochoice suggest mortgages are refinanced well before the end of their original term. Lenders penalise payouts in the first 5 years, which confirms that refinancing inside of 5 years is happening more often than they would like. The reason is competition and failure of lenders to really look after borrowers. Regardless, it is reasonable to start with a basic assumption the mortgage that you establish today will be inadequate in 3 to 5 years.
Be diligent and move swiftly.
It is very important to make an informed decision, however it is also important to reach your decision within a few weeks of asking for mortgage comparison information. If the process takes longer than that, you are probably making your assessment on outdated information. This may affect your results dramatically and if extended delays occur, you should restart the process.
Tip: If the RBA has recently announced rate increases, ask your broker or lender to factor in the rate rise if it hasn’t already been included in the current advertised rate.
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