Are my financing arrangements as competitive as possible? Countdown 1 to Property Observer wealth-creation strategy webinar
The Reserve Bank’s latest cutting of the official cash rate is focusing the attention of property investors on how much they are paying in interest on their investment loans. Indeed, the latest cut and the varying responses of the lenders should prompt investors to make sure their loans are highly competitive.
First, you should understand exactly how much you are paying on your existing loan in interest rates and fees.
Upon request, your lender must provide you with a fact sheet setting out how much you are paying on your loan in dollar and interest rate terms. The fact sheet covers the total amount payable over the life of the loan (given the current variable rate), amount payable each month and ongoing fees. (See a sample loan fact sheet on ASIC’s consumer website, MoneySmart.)
Armed with the fact sheet on your loan, you can then compare competing loans.
Mitchell Watson, a senior analyst with interest rate researcher Canstar, suggests that borrowers prepare a short list of what appear to be the most competitive loans.
Interest-rate researchers such as Canstar and InfoChoice publish detailed tables of mortgage rates online.
Don’t just compare advertised rates but also the so-called comparison rates which incorporate the impact of up-front and ongoing charges (not all costs must be published), based on a 25-year, $150,000 loan.
Watson says the next step for property investors is to work out exactly how much they would pay in dollar terms each month and over the expected life of their borrowing for each of the competing loans on their short list. He points out that the mortgage calculators of the major banks provide a means for borrowers to compare the dollar cost of different loans from different providers. ASIC’s MoneySmart website also has a “mortgage switching calculator”.
Of course, many investors rely heavily on mortgage brokers to hunt them down the best deals. Nevertheless, smart investors make sure they are as informed as possible about what is happening with interest rates.
If you are contemplating switching loans, carefully calculate the possible costs involved with this. Although the government has barred mortgage exit fees on loans written from July last year, lenders can still charge loan discharge and administration fees. With fixed-rate loans, break fees are payable and can vary significantly depending on how early the loan is being terminated and the size of the loan.
Watson also suggests borrowers check whether an application fee is payable on any new loan being considered. He suspects most lenders would be willing to waive their application fee to win your business.
Perhaps Watson’s most valuable piece of advice is that you should try to negotiate a lower rate with your existing lender. But first do your research of competing rates so you can strongly negotiate.
“Existing lenders will look to retain your business because it is a lot cheaper for them to keep an existing customer than to attract a new customer,” says Watson.
Watson stresses that few borrowers pay the standard variable rate on their property loans. “The standard variable rate tends to be a benchmark rate which other products are discounted off.”
Craig Morgan, managing director of mortgage provider Independent Mortgage Planners, agrees with Watson that the starting point for getting a better deal is to try to negotiate with your existing lender. “If you don’t ask, you don’t get.”
He says borrowers should inform their existing lenders that they have researched competing rates and are thinking of taking their business elsewhere.
Morgan stresses that borrowers comparing competing loans should work out exactly what they are likely to pay in dollars given the size of their loan and the length of time the loan will be held.
Comparison interest rates can be misleading, he explains. This is mainly because the loan that an individual borrower is seeking may be much bigger and the likely time that the loan is likely to remain in place may be much shorter than the theoretical information used to calculate comparison rates. (As mentioned, comparison rates are based on 25-year, $150,000 loans.)
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