Take Your Dollars And Run

Sydney Morning Herald

Tuesday June 4, 1996

By Annette Sampson

Why refinancing looks better than ever.

THE State Government's recent abolition of stamp duty on refinancing a mortgage has removed a major obstacle for home-owners and investors shifting their loans. And with the variable rates being offered differing by up to several percentage points, there is a strong financial incentive to shop around - and, if necessary, move your loan.

RAMS Mortgage Corporation director Mr Robin Redfern says his company received about 300 calls from people wanting to refinance their mortgage and save on stamp duty the day after it was scrapped in the State Budget.

While stamp duty is generally not a major consideration for borrowers, it does add up. Mr Redfern says the costs in NSW were $341 on refinancing a $100,000 mortgage and $741 on refinancing a $200,000 loan.

Scrapping the duty makes it worthwhile to switch, he says. "Before, (that cost) was a bit of a barrier, but now there is no impediment and it gets down to the rate and the benefits on offer."

Until the Commonwealth Bank's surprise announcement last Friday that it was cutting its standard variable rate to 9.9 per cent (but not until July 15), most borrowers with the major banks were paying rates in excess of 10 per cent. It is likely other lenders will reassess their rates this week, but the market is so competitive that big differentials may still apply.

Refinancing - even with a bank's "basic" home loan product - can cut interest costs by at least 1 percentage point. Of course, there are costs in switching. But even with entry costs to get into the new loan (commonly $500 to $700) there can still be a saving in Year One. Provided the rate differential remains, the savings can be substantial over four or five years.

But refinancing is by no means as easy as it sounds. In addition to the plethora of new lenders on the market, most lenders now offer two or three different loans - not a standard product as they did in the old days. And this is just talking about variable rate loans. With different fixed-rate loans added, the number on offer from any one lender could move into the double digits.

Despite recent media reports that there has been a huge upsurge in interest in fixed-rate home loans, banking sources say these have been more in the form of one- or two-year "introductory specials" rather than traditional fixed-rate loans.

"If you go into a fixed-rate loan you are actually making a judgment about interest rates - and even economists don't get interest rates right," says a National Australia Bank spokesman, Mr Haydn Park. He says growth has been strong in the honeymoon or introductory rates, which "have been a good marketing tool for us."

Honeymoon rates have often been criticised as rewarding new borrowers at the expense of existing customers. But Mr Park says: "Existing customers can also switch into our lower rates if they want" - for a cost of $250.

Aussie Home Loans' managing director, Mr John Symond, says: "If a customer rings up their bank and wants a better deal, they will be offered a two-year fixed rate or a one-year honeymoon rate. That's the only reason fixed-rate loans have grown so much."

But Mr Symond says once the "honeymoon" is over, the customer will faced the same problem again.

As the accompanying graphic shows, the "one-year or less" honeymoon rates on offer can look very attractive. Endeavour Credit Union has a 7.2 per cent honeymoon rate, but most lenders offer less than 8 per cent.

Only Macquarie Residential Mortgages and Priority One of the mortgage originators offer honeymoon rates of 8.5 and 8.8 per cent respectively.

FAI First Mortgage's managing director, Mr John McGee, who claims 70 per cent of his customers are people refinancing (mostly from the banks) says he has found some customers can negotiate a longer period on the honeymoon rates "if they stamp their feet hard enough" but the results are "very variable and not something the banks want to highlight".

"We're getting calls from people who have just run out of their honeymoon period and are finding themselves at 10.5 per cent, and from others who have been paying at 10.5 per cent for some time and have had enough," he says.

An Advance Bank spokesman, Mr David Brown, says his bank's approach to customers who don't want to stay with its standard variable rate of 10.5 per cent is to "sit down and talk about their requirements and see where that leads to".

This may see them switching to a fixed-rate loan (Mr Brown says the bank's two-year 9.25 per cent is proving popular) or to the bank's Neworld subsidiary, set up as an independent arm producing securitised home loans.

"We're catering to people who want a no-frills loan and who want a lower rate," says Neworld's chief executive, Mr Terry Bourke. "A lot of people are saying they don't want redraw facilities, fortnightly repayments or a branch network because their main objective is to get the lowest rate in town.

"Those people are opting out of the mainstream and heading towards the alternate lenders, which is where we're competing. It's a different market."

Mr Bourke says most of the enquiries Neworld has received have been from people wanting to refinance. Two-thirds of the business written has been owner-occupiers and one-third investors.

St George, Metway and Westpac have also introduced "discount" or no-frills loans offering cheaper rates but limited services. On Friday Commonwealth also officially launched its Economiser Home Loan, which has a variable rate of 8.9 per cent but limited facilities and an $8 monthly service fee.

However, some of the largest mortgage originators object strongly to the suggestion that "cheap" home loans are necessarily "no-frills".

Mr McGee says FAI has "early repayments, flexible payment terms, portability and the option to swap to fixed rates" on all its discount loans. It will "shortly" be introducing a redraw facility.

Mr Symond says AHL's products "have now got more features than a lot of the banks' ... We've got a no-cost redraw facility at 8.9 per cent plus portability, the ability to split the loan between variable and fixed rates and the choice of fortnightly or weekly repayments".

Mr Redfern says RAMS has a Better Home Loan which has extra flexibility - including a able and fixed rates and the choice of fortnightly or weekly repayments".

Mr Redfern says RAMS has a Better Home Loan which has extra flexibility - including a redraw facility and an interest rate of 9.2 per cent. Its Basic Home Loan has an interest rate of 8.9 per cent.

The big question about the new mortgage players - and the one which is still winning the banks a lot of business - is how they will perform over the longer term.

Mr Park says NAB's research has consistently shown its customers' prime concerns are whether they can afford the loan, how flexible the lender will be if their circumstances change or they get into trouble, the total cost of the loan - and only then, the current interest rate.

"With women in particular, having a roof over their head is paramount," he says. "They don't want to deal with someone who puts that at risk. We market ourselves on flexibility of repayments and we have increased market share every month for the last six years."

Mr Park says most people are still very conscious of the late- 1980s, when interest rates hit 18 per cent. They want to know their lender will be flexible and stand by them. The concern is that because the mortgage originators source their funds from the wholesale market, they will not be able to restrain rate hikes - or allow customers the flexibility to cope with them.

The originators point out that the banks also now source about 80 per cent of their money from the wholesale market and they say if a borrower has a good record and equity in the property, they have room to be flexible.

Mr Redfern says RAMS assesses its customers on repayments required at a 12 per cent interest rate to ensure "borrowers can sustain some rate pressure" and asks: "What do the banks assess their clients at?"

Mr McGee points out that "there have been interest rate rises in the last two years and our rates didn't rise as much as the official cash rates or as much as some of the banks".

Where ill-feeling is generated against the mortgage originators is in the fact that some use several lines of funding. This can mean existing borrowers are paying a higher rate than that advertised for new customers.

A Commonwealth Bank spokeswoman, Ms Lyndell Deves, says the Commonwealth has had a number of customers move to it from the originators because of this.

"Others have said it is a service issue," she says. "Because they can get close to matching the originators with our fixed rates, they like the flexibility we can offer."

As part of its rate cut, Commonwealth says it will make "limited conditional offers" to subsidise switching costs such as legal expenses and prepayment costs for customers of other banks who want to refinance.

According to the interest rate research group Cannex, there are several traps to watch if you are considering switching your loan:

*EXIT fees can be quite hefty if they are based on a percentage of the actual loan amount - not just the outstanding balance. It pays to check these upfront. Ask for the minimum and maximum amounts you can incur in dollar figures.

* MOST banks these days recommend you use a solicitor if you are refinancing. Remember to add these costs to the other entry costs in deciding whether it is worth switching.

* IF you are taking a one-year fixed rate or introductory rate, ask which rate the loan reverts to at the end of this period. There have been claims that some loans from the originators revert to a rate higher than their advertised variable rate.

* MAKE sure you have the time to shop around for the deal that best suits you. Your own bank may also be willing to match offers from elsewhere.