Please visit the ASIC Mortgage Switch Calculator for more information.

One of the main costs associated with mortgages is Lenders Mortgage Insurance. The ASIC calculator does take this into account but you need to find out what it will be. You should discuss this further with your mortgage adviser.

Lenders Mortgage Insurance (LMI) is an added cost where the size of the loan is greater than 80% of the value of the property against which the loan is being taken out. If the loan is greater than 80%, LMI will be an added cost which is usually added to the home loan amount.

The problem is if your loan is still greater than the 80% level new LMI will be needed for the new loan. To complicate things further a new valuation will be needed by the new lender and this may also cause further issues for consideration.

Latest Big Four Bank Mortgage Rate Increases

These rate increases have now been passed on by all the big four banks to their products as shown below:

Exit Fees in the Spotlight

ANZ whilst increasing its rates by 0.39% also indicated that it would be abolishing the Deferred Establishment Fee (an exit fee) for mortgages and providing the following incentives for new and existing customers:

Waiving the loan approval fee of $600 and a subsidy of up to $1,000 to offset exit fees from other lenders for those switching. BUT ONLY IF YOU SWITCH TO A 3 YEAR FIXED RATE HOME LOAN.

ASIC in a media release on 10 November signalled their intention to prevent banks charging unreasonable exit fees.

“Mr D’Aloisio said that ASIC’s initial focus will be on the highest fees in the market as they create the biggest barriers to switching. ‘We will challenge lenders who charge high fees to justify how their fee reflects actual losses caused by early termination. Where an exit fee cannot be justified by the lender, ASIC will take compliance or enforcement action.’”

Home Loan Switching Tips

Switch to a basic home loan product. Every major bank has two types of variable home loans, a basic product and a “standard” product. There is typically very little real difference in features between these products but the interest rate difference across the Big Four Banks ranges from 0.50% to 0.70% pa. On a $300,000 loan this works out to be $136.33 pm or 1,636 pa. If this was applied to your loan it would result in paying off your loan up to 4 years and 7 months earlier.

Hang on – What are the Exit Fees and Application Fees

Before you rush off to switch, ask your current loan provider what the exit cost are. Make sure any recent interest rate increases are accounted for in the calculations. If the costs are significant it may pay to wait 12 or more months as exit fees are typically much higher in the first 5 years. Each product is different and you need to find out these details from your bank.

You also need to take into account all costs associated with the new loan. If your loan to equity ratio is high there may be more costs involved.

The easiest way to switch home loans is to consult a professional mortgage broker. They are required by law to take into account your situation before making a recommendation. A good mortgage broker will also be familiar with most products on the market and be able to answer any questions.

Warning: Home loans have exit fees. Please consult your current lender to find out what they are before considering switching to another product. It’s strongly recommended that you consult a reputable licensed lending adviser before taking any action as large financial losses may result from imprudent decisions.

ASIC Exit Fee Summary

ASIC have compiled a summary table of exit fees to help the public understand what you might face when you switch home loans.

Summary

Key issue	Summary of ASIC guidance
What is an early exit fee?	Any fee payable on early termination of a residential loan, generally including deferred establishment fees.
Types of costs and losses which may be able to be included in an exit fee	break fees when a fixed rate loan is terminated administrative costs (e.g for processing the early termination and calculating the payout figure) third party costs that arise because of the early termination costs that have not been recovered because a loan with a honeymoon or introductory interest rate is terminated early unrecovered establishment costs arising from a lender’s inability to recover establishment costs during the shortened period the loan was on foot.
Types of costs and losses which may not be included in an exit fee	loss of profits that would have been received if the loan proceeded to the expected term or if the loan had lasted beyond the time at which the customer terminated the loan marketing costs and other costs associated with obtaining new customers costs associated with developing new products.
The limited circumstances in which a lender may vary an exit fees	Lenders will generally not be allowed to increase early exit fees on variable rate loans after the loan has commenced, particularly if the early exit fee comprises unrecovered establishment costs.
How lenders can explain their early exit fees transparently	explaining in a meaningful and clear way when the fee will be charged clearly stating the amount in dollars of the fee or, if that is not possible, the method of calculation using prominent warnings to explain risks associated with early termination fees, particularly break fees using meaningful worked examples of break fees, as long as they can be provided in a way that is not misleading.
Break fees on fixed rate mortgages	The break fee must reflect the cost incurred by the lender because the loan was terminated early.

Note: the following table is reproduced from the ASIC website for your benefit in accordance with ASIC’s linking policy. Please note this site is not affiliated in any way with ASIC and the reproduction of ASIC material should in no way infer that this site is endorsed by ASIC.

Details of the ING Direct $1,000 offer

“Refinance your existing home loan to ING DIRECT and open an Orange Everyday by 30 June 2011, and as our way of saying thanks and to help you with switching banks we’ll credit your Orange Everyday with $1,000!” (from ING Direct website)

You must register here before 30 November 2010.

Issues to consider

What are exit fee costs of our current mortgage?
In the first few years of a mortgage exit fees can run to tens of thousands of dollars. You need to ask your bank for the details based on the current interest rate. Be aware that if there is another interest rate rise between when you ask to switch and when the switch takes place the exit fee could be much higher.

Compare ING Direct Interest Rates

As you would expect ING Direct have a suite of competitive home loan products.

At the time of writing, the only the Commonwealth Bank has raised rates of their home loan products in response to the Reserve Bank of Australia (RBA), increasing cash rates by 0.25% on 2 November. The Commonwealth Bank citing increased costs associated with borrowing wholesale funds, increased their home loans by 0.45%. The remainder of the big four banks have remained silent waiting for consumer anger to pass.

Be aware when making comparisons, that expected increases to ANZ, NAB and Westpac home loan products has not yet been passed on. It is expected that these increases will be at least 0.25% and up to 0.45%.

Costs of Switching Home Loans
Whenever you consider changing products you should make yourself aware of any costs that may apply. This includes costs from your current product provider and the provider you are considering switching to. Even though the new product may have a lower interest rate and repayment schedule, the cost of exiting your current product may mean that it is not financially beneficial to switch. Exit fees for some home loans in the first few years can run into tens of thousands. You should also be aware that any quoted exit costs will probably change if there is a rate rise between when you ask to switch and when the switch actually occurs. If there has been a interest rate change initiated by the RBA, be very careful.

Pro’s and con’s of ING Direct
ING Direct follows a “direct banking” model which is heavily reliant on internet and phone banking to service your needs. They do not operate typical bank branches and a limited physical presence allows them to have lower running costs and hence the ability to offer more competitive products. They are owned by the international Dutch banking group ING Group, the third largest savings bank in the world. They currently have approximately 1.4 million Australian customers and are Australia’s fifth largest bank.

Given the recent trend of home loan interest rate rises, many home owners may be considering switching to a fixed rate home loan. Home owners are facing a similar situation as they did approaching the Federal elections in 2007. At that time the mortgage rates increased rapidly and many opted to switch to a fixed rate loan only to see the RBA rapidly cut rates due to the global financial crisis. Many borrowers who did fix were left with monthly repayments substantially higher than variable rate repayments. Now the RBA is trying to fight inflation, house pricing bubbles and bring rates up from historically low rates so interest rates are on the rise.

Home Loan Standard Variable Rates vs 3 Year Fixed Rates

Variable vs Fixed Rate Home Loans

This graph shows the average standard variable home loan interest rate and average 3 year fixed home loan interest rate from 1990. The movement of both these rates closely track the cash rate which is determined by the RBA. Sometimes the variable rate leads the change in direction and sometimes the reverse is true. Picking where rates will be in the future is impossible but it gives you a good idea of how fast rates can change.

The big issue is that fixing your mortgage is a gamble. It’s a massive gamble on the direction of variable interest rates. You need to consider why you are doing it and what are the possible outcomes if you do. Put simply you can either win or lose but depending on your circumstances it is not always cut and dried.

Why Switch to a Fixed Rate Mortgage

Fixing your interest rate gives you the knowledge that you repayments won’t change for the period they are fixed. If your repayments are a large part of your income then this could give you peace of mind. Sure you could lose out by paying more than you might have needed to but you can rest assured you will still own your home at the end of that period (assuming other variables don’t change). If making the monthly repayments is a worry and a 2% to 3% or even 5% increase in rates will see you lose your home then this might be something to consider.

Downside to Fixing to a Fixed Rate Mortgage

• Miss out on lower interest rates
• Break fees if you switch out
• New loan fees

Alternatives Options to Fixing your Home Loan

Consider a no frills basic home loan. No frills basic home loans typically are around half a percent lower than standard variable rate home loans. They don’t always have the extra features of the standard variable rate loans but you should consider if the extra features are really needed. There are many no frills basic home loans that have redraw and offset accounts which will suit many borrowers.

Fix a portion of your loan. You can take an each way bet by fixing part of your home loan.

Fees to consider

Termination Fees – Most banks will charge you a fee for terminating a home loan within a certain time period commonly 5 years. In most cases this is payable even if you are switching to a new loan with the same lender.

Break Fees – Most mortgage lenders have what are called break fees. If you are changing from a fixed interest loan where the interest rate is higher than the variable rate then depending upon the size of the loan then this can easily run into tens of thousands of dollars. When the interest rate of the fixed loan is below the variable loan then you may not have to pay a break fee. In the first example the lender is losing money in the second they are making money hence the difference. You will need to do a cost benefit analysis to work out whether it is a good idea to switch. Weigh up the break fees and other costs versus the interest savings on your monthly repayments over the time period left on your fixed loan.

You also need to factor in the costs of the new loan. This is not a comprehensive list of issues to consider and it is a complex issue best dealt with by professionals. Please take advice from your financial adviser before taking any action.

For help choosing a suitable loan you might consider using a Mortgage Broker. Most mortgage brokers will be able to find out what your needs are with respect to features and then find the best one from a large panel of lenders.

Disclaimer: Switching loans is a complex issue. You should always take advice from a professional before undertaking any action as it may lead to large financial losses.

With most banks looking as though they will pass on the same sized increase this time, the increase in monthly repayments per $100,000 borrowed will be just over $15 per month.

For those with an average mortgage of around $300,000 this mean finding an extra $46 per month.

The RBA reflected that Australia had a mild downturn in comparison to many countries in 2009 and that many asian countries were still growing strongly. They justified the rate rise acknowledging inflation had risen, the risk of a serious monetary contraction had been avoided and because current interest rates were much lower than normal.