May 23, 2019 | 11:37 PM

Get Out of Debt

24.06.2008When interest rates rise - should you switch lenders?

Official interest rates have peaked at 7.25 per cent - the highest since December 1994 when they were 7.5 per cent - and it's playing havoc with household budgets. FatCat looks at the issue of switching lenders.

By Sam Walker

With 12 interest rate hikes since May 2002 and some experts predicting more before the end of the year, it’s crunch time for many home buyers struggling to meet mortgage repayments. But is refinancing the answer?

While there are some who could stand to gain from choosing a more appropriate loan, the experts warn there is no quick fix to reducing debt and the costs of refinancing could outweigh the benefits.

At the least, costs entail government fees, which vary from state to state. But depending on the loan other costs could include exit fees with the existing lender, establishment fees with the new lender, stamp duty, property revaluation and mortgage insurance.

The Barefoot Investor, Scott Pape, says it takes about 19 months for a loan to become profitable for the lender, so they impose penalties if you want to get out early. He says exit fees are a “sting in the tail” that can amount to several thousand dollars for those wanting to leave an existing loan.

There is no magic solution to reducing debt and borrowers should beware of anything that seems too good to be true.

“If anyone is offering to slash your mortgage repayments, there’s only two ways you can pay off the loan quicker – get a lower interest rate or you can repay more,” Pape says.

Sydney-based mortgage broker Pepita Bowgen has seen a number of people treading a fine line to maintain financial survival and an increasing number of mortgagee sales. But borrowers need to weigh up all the options before choosing to refinance. “It generally does always cost money to refinance – it’s whether the cost is going to be made up in a reasonably short time for each product,” Bowgen says.
“You wouldn’t change lenders unless you were going to get something that suited you better.”

It can also be a time consuming process, taking four to six weeks and is often a painful experience with a mountain of paperwork, the need to prove your income and equity.

With the market slowing, some regions, including pockets of Sydney, have seen a decrease in property values. For people that borrowed 100 per cent of the loan at the peak of the property cycle, this could be a problem if refinancing.

Bowgen says someone that borrowed 100 per cent of a $300,000 loan and still owes $295,000 might find their property is now only worth $280,000 and they owe more than its value – they have negative equity.

Many institutions won’t lend to people with negative equity.

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