Understanding mortgage exit fees
Supermodel Linda Evangelista once famously said she wouldn't get out of bed for less than $10,000 a day.
While I'm certainly no supermodel, I wouldn't refinance my home loan for less than a 0.5% difference in interest.
The ban on mortgage exit fees may have sparked a deal season - the big four rolling out some irresistible mortgages - but it got me thinking: should we be refinancing at the drop of a fee? Exit fees typically apply if you repay or refinance your loan within the first five years. The ban on mortgage exit fees applies on new loans from July 1, 2011.
An ASIC - the securities and investments regulator - report on exit fees found that while the average early termination fee sat around the $1000 mark for banks, non-banks did charge the most.
I've always been quick off the mark to say "shop around for a better deal", but when it comes to big-ticket items such as your home loan, you need to crunch some numbers first before you get up and leave.
Here's where I'm coming from: If your current mortgage is $300,000 at 7.2% you're paying about $2037 a month in repayments over a 30-year term. If you switch to a loan charging 6.7% it would take you 19 months to recoup a $2000 switching fee. If the difference in interest was just 0.2% it would take a massive four years to break even.
Only if all things remain the same would you save a considerable amount in interest payments over the full term, but what's the chance of your new lender remaining cheaper than your existing lender over the next four years?
Nobody knows and that's the risk of refinancing your mortgage. The interest rate difference needs to be sizeable, or your switching fees need to be minimal, for you to pack up and leave. The longer it takes to recoup your break costs the more risk there is that your new loan could lose its competitive edge.
While the ban on exit fees has made it easier and cheaper for home owners to switch between lenders, it hasn't made it free. There are heavier costs associated with switching mortgages such as break costs on fixed loans, mortgage insurance (see Sweet nothings, page 43, April 2011) and, to a growing extent, now set-up fees.
Depending on which research house you speak to, a number of lenders have already repositioned their products to adjust to these new regulations. According to comparison website Mozo, since late June 37 lenders have removed exit fees but 13 have increased other fees or rates at the same time.
Mozo's Kirsty Lamont says: "The government's ban on exit fees was supposed to be a win for Australian home owners and borrowers, making it easier to switch home loans and stimulate competition.
"But news that smaller lenders have announced price increases, while the big banks have not, confirms fears that competition in the home loan market may be lessened, not increased, as a result of the exit ban."
Canstar Cannex's mortgage specialist Mitchell Watson says they've seen some minor changes but it's more a case of deferred establishment fees now becoming establishment fees. This begs the question then if a home owner sticks around with their lender for more than five years, does that mean they get the "deferred establishment" now turned "establishment fee" back? Mitchell thinks not!
RateCity's research shows the banning of exit fees has not had a major impact on lenders' decisions to change their fee structure, with only three lenders on their books increasing upfront fees to date.
If the ban on exit fees was an ill-conceived policy with unintended consequences, time will tell. The chief executive of non-bank Resi, Lisa Montgomery, believes other fees will begin to creep into loan agreements.
Three areas Montgomery says consumers need to watch are application fees, ongoing fees and settlement fees. "Competition won't allow this to hit consumers too hard," she says. And as for whispers that the ban on exit fees will be the death of non-banks, Montgomery is quick to say that they will overcome this. "We just have to change the way we do business," she says.
Mortgage exist fees checklist
1. Find out the cost of switching. This includes the costs of leaving your lender plus the upfront costs, including any legal fees for your new loan. Mortgages prior to July 1, 2011 can still incur an exit fee. Break costs apply to all fixed home loans.
2. Work out your break-even point. This is the time it would take you to recoup the costs of refinancing. Just divide the costs by your monthly repayment savings.
3. Make a decision. There's money to be saved; it just depends on your circumstance. Always negotiate with your existing lender first. You can save just by moving from a fully featured home loan to a basic-style loan without all the costs.