Described in the media as the lazy tax, with other data suggesting that 90% of Australians do not know the interest rate they are paying on their mortgage, it is no surprise that many are paying way over what they could be. Yet on a daily basis we read about Australian banks making abnormal profits largely at the expense of the consumer. So the question is why are home owners reluctant to refinance?
Apathy
The simple fact of can’t be bothered. Mortgages are paid on direct debit, and the mentality seems to be one of ‘set and forget’. The payment leaves our account every month, we accept this and don’t think much more about it, even though it is the largest of our monthly outgoings and the one where most savings could be realised. So whilst consumers will shop around to save a few cents on a litre of petrol, they are needlessly paying thousands of dollars in unnecessary interest because they are apathetic towards the most expensive outgoing they have.
Too Difficult
It’s too hard, or too much aggravation to find out what other options there are, which is cheaper and what you need to do to change lenders. It’s easy for the government to suggest shopping round and changing if you aren’t happy, but in practice people start to have a look at the market and believe this is a mountain that’s too hard to climb. Companies switch suppliers or products when the problem they are experiencing outweighs the cost of the solution to fix it; consumers are no different. With refinancing, the bank often hasn’t done anything wrong, and therefore the cost – in this case being time and understanding rather than monetary, simply does not outweigh the reality of saving a couple of hundred dollars a month.
Better the devil you know
“I’m not happy with my bank, but what if the competition are worse?” is the subconscious concern. “I’ve never banked with anyone else” is the institutionalised response to the idea of change. “They’ve always looked after me and I’d feel disloyal moving” says the borrower being looked after at 1% higher interest than the competition
Well let’s consider the alternative. What if the new lender has the same or better levels of service and you are paying a lot less for the loan? People do fear change and the unknown, but by and large switching lender means a different website and company logo on your statements, with considerably lower costs. Every so often people vote for a change in government because they have become disenchanted with the incumbents and believe a change will mean a better Australia. This should really be no difference with banks. If more people voted with their feet, services and prices would improve.
Expensive to change
There are some expenses associated with changing lender, namely a discharge fee to close your current mortgage account, a registration fee to put your mortgage with a new lender, and any application fees the new lender may have (although many are providing cash back incentives to eliminate these costs). If you allow $1,000 for this, it should be more than adequate. The thing to realise is that this is not an out of pocket expense, but these fees will be apportioned to the loan account at settlement. Additionally whilst you incur these costs, the overall saving in the first year should still be great than these fees to make it worthwhile. In other words look at the big picture. If interest savings amount to $2,400 per annum, and you have $800 in costs to change bank, you are still ahead by $1,600 in year one. So rather than being expensive it should be a no brainer.
My Situation has changed since getting the mortgage
This is not uncommon. People change jobs, income changes, children arrive, and circumstances do change, but this does not necessarily mean you are ineligible to change lender. You just need an evaluation based on your current situation. Lending standards have changed since the GFC, so in some cases this can have a negative impact on your borrowing capacity, but at least you know where you stand. The worst case scenario is you stay with the same lender, so there is no downside to finding out what’s possible. In the same way that you might go to the Doctor for an annual health check, you can do the same with your mortgage and make an informed decision from there.
How can a Mortgage Broker help?
A broker will work with you to work out what is best for your situation. The service is cost and obligation free. Remember a mortgage broker is an expert in the world of lending, so rather than you spending time and energy trying to work things out, use the services of a broker who will do this for you and in a fraction of the time. Ultimately the decision to change lenders and to whom is yours, but a broker will provide invaluable assistance along the way, namely:
- Evaluate your circumstances and work out the best deal for you
- Explain what you can and cannot do and why
- Provide an obligation and fee free service
- Explain lender costs
- Explain the pros and cons of each lender
- Give you strategies to pay down your loan faster
- Tell you specifically what documentation is required
- Prepare the application for you and manage the whole process to settlement
And the benefits?
- Save you thousands of dollars over the life of the loan
- Reduce the term of the loan so you are mortgage free sooner
