How to navigate fee-infested mortgage waters
Before you leap into re-mortgaging your home for the sole purpose of saving money on repayments each month, step back and take a good, close look. With Christmas coming up, there's no doubt the temptation to make ends meet is growing. Paying less on your mortgage means more cash in your pocket. At least that's the theory. But the grass is not always greener on the other side. Careful thought is needed before you take the plunge, as there could be dangers lurking in the loan you are getting out of and the loan you may replace it with.
If you have made extra repayments on your loan, think twice about redrawing this money. Is Christmas shopping really worth sending your home loan back to where you started? Re-financing to a cheaper loan may seem an attractive option, especially when you weigh up the potential savings in interest. Before you act, examine the conditions of your current loan. It may well contain exit penalties which, if applicable, will shoot down any notion you had of saving and any move you make can come at a hefty price.
RateCity has identified the true cost of a loan paid out over a short term can be radically higher than you think when exit penalties are added to the total cost. A loan's exit penalties typically consist of two components: early repayment penalties and deferred establishment fees. Bear in mind that some other fees such as discharge fees can also be applicable, regardless of whether you pay out earlier or not.
The following table indicates the exit penalties that may be applicable at different points in the life of a loan.
| Exit Penalty | |||
|---|---|---|---|
| Exit within | |||
| 2 years | 3 years | 4 years | |
| Minimum | $0 | $0 | $0 |
| Maximum | $7,546.72 | $7,546.72 | $6,733.34 |
| Average | $1,403.16 | $1,222.43 | $933.17 |
| Source: www.cannex.com.au 19/10/2007 | |||
It comes as no surprise that the earlier you exit, the higher the exit penalties you may incur. When trying to make a decision on whether to refinance or not, it would be wise to take into account the exit fees you may be up for and how long you would have to wait to reap any real savings with your new loan.
Here are a few checks you can apply:
- How many years have you been with your current provider and what exit penalties will apply if you pay the loan out now?
- Will the savings with a new lender be achieved immediately or will the cost of exiting your current loan eat into the expected savings?
- How long you propose to have the loan for will make a big difference. If you aim to pay your loan off in the next couple of years and, as a result, are making excess payments, the savings made on interest would reduce over time.
- Check whether the new provider has exit penalties as well, in case you pay off your loan quicker than anticipated.
- Do not forget to include the set up costs of the new loan as well as upfront and establishment fees plus mortgage stamp duty.
If the figures add up and you really will be in a better financial position by re-mortgaging, go for it. If not, stay put rather than incur hefty exit penalties you hadn't planned on. You can always console yourself with the thought that it's about your turn to win Lotto, isn't it?
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