The things you should know about your mortgage



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June 30, 2011

With a ban on excessive early exit mortgage fees now in place, borrowers are being urged to take advantage of switching without penalty to find a better deal on their home loans.

New legislation banning excessive early exit fees, or deferred establishment fees, came into effect on July 1 amid much criticism. In late June the Senate ruled to move ahead with the ban squashing attempts to overturn legislation.

Damian Smith, chief executive of RateCity, says that abolishing the early exit fees is helping some borrowers to switch to better deals but adds that more can be done about other heavy costs to switch.

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

What is LMI?
LMI is charged by all lenders on loans for 80 percent or more of the property value. It’s an insurance policy for the provider, should you default on your mortgage.

The more you borrow the higher the LMI too. For example, if you’re purchasing a property worth $300,000 and have a deposit of 10 percent your loan will be $270,000 with $4500 LMI. Buy a $600,000 property with 10 percent deposit and your LMI fee jacks up to about $17,500.

“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,” Smith says.

And given that there are just two major LMI lenders in the country (Genworth Financial and QBE) there’s a good chance that when you switch mortgages and take out a new LMI policy that you’ll be paying for the same policy, for the same property and 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,” Smith says.

Tips for switching
If you’re not happy with your current lender or simply want to find a better deal on your mortgage, there is still good reason to switch providers despite LMI. Here’s how:

  • home loans online to see what else is available on the market and which lenders are offering the best deals and what your repayments will be. As a guide look at comparison rates, rather than advertised rates, as this is an average of the rate including fees over the loan term.
  • Before you switch talk to your lender and see if they will negotiate a better deal on your current mortgage or switch you to a cheaper offer without penalty. In this competitive climate, lenders are more likely to try to retain your business.
  • Do the sums before you make the move too and ask your current and future lender about any hidden switching fees, LMI and other charges, because these can quickly add up.

 

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