The art of comparing home loans

Comparing is something we all do on a daily basis. However comparing a home loan is a little different to comparing the price of milk or bread. Understanding the right way to compare financial products is essential when trying to compare home loans.

The Australian home loan landscape is full of spruikers offering discounts, cheap rates, no fees and other bells and whistles. It is important to understand what these offers actually mean to you as the borrower. Which loan features are essential and which are nice to have and are not worth pursuing.

Understanding Comparison Rate

In comparing home loans it is important to compare the home loan comparison rate not the advertised rate associated with a mortgage. The difference between the two can be quite significant. The Comparison rate will be the average rate you can expect to pay over the life of a loan with the lender of your choice. This rate will include all associated loan fees and is the ‘true’ interest rate.

Selecting Home Loan Features

Do not get caught up in loan features that you do not need. If you are not intending to upgrade your home and move there is little reason to look for a portable mortgage. However if your plans include selling your property in the short to medium term then understanding exit fees as well as the portability of your loan is important. Do not fix your mortgage if you intend to sell or refinance the property. Generally the highest exit fees apply to a borrower breaking up a fixed mortgage contract. Do fix, if you believe the rates are going up and your financial position in a sensitive one.

Banks vs Non Bank Lenders

Many borrowers are concerned to use a non-bank lender when applying for a mortgage. There is no real reason for this concern. All lenders operating in the Australian mortgage market, are regulated by the government. In fact many non-bank lenders are specialists in bad credit or self employed home loans and can offer deals not available through the mainstream bank lenders. It is important to consider all lenders when comparing home loan deals and not restrict yourself to the big banks.

The Lowdown on Low Doc Home Loans

Low Doc Home Loans are still available to people who are self employed and would prefer to substantiate their income in ways other than providing a tax return.

Low Doc Home loans have changed significantly since the introduction of the National Credit Code earlier this year. In previous years it was possible to qualify for a low doc home loan with little more than a signed declaration by the borrower. Today qualifying for a low doc home loan is more difficult.

The National Credit Code has introduced a requirement for all lenders to ensure that the borrower is able to service the loan they have applied for. The only way in which this can effectively be done is via an independent income or revenue confirmation. Many Low Doc loans have been transformed overnight with banks either cancelling the product of drastically changing it.

Applicants are asked to demonstrate their income in some other way. It could be via copies of bank statements or Business Activity Statements. However we still have access to Low Doc lenders who will process a loan application without the borrower needing to provide copies of BAS statements or bank account statements.

You will need to provide evidence of having been in business for some time with a registered ABN and possibly GST. While the home loan industry is now more regulated than it was 12 months ago, there is still room for a low documentation borrower looking for a good deal on their mortgage.

Home Loan Exit Fees – what to expect after July 2011

Proposed abolition of Home Loan exit fees by the Federal government is fraught with danger. While at face value it is all positive – consumers will pay lower loan fees, it will be easier for a borrower to switch their mortgage between lenders, banks will charge us less, surely we should all vote the change in? However as with many political proposals it is important to understand the underlying impact of this change, this is the impact that the treasury will not talk about.

Cheaper Home Loans?

Anyone who believes that with the banning of loan exit fees, home loans will become cheaper, does not really understand the workings of the Australian mortgage market.
Every lender has set costs of funds. They also have established profit margins which must be maintained with all financial products including home loans. Exit fees are levied in order to assist a lender recoup the costs associated with the loan being paid out earlier. These tend to be higher for non-bank lenders who offer cheap rates but expect the borrower to stay for at least 5 years.

No amount of government legislation will force lenders to make less money on home loans. All that will happen is borrowers will be paying more in loan application fees, valuation fees, settlement fees, legal fees as well as the home loan interest rate. Borrowers will be levied the required amount of fees to ensure that if they take their loan elsewhere shortly after settlement, the lender still makes their profit.

Today, the only people who are asked to pay more on their mortgage are the borrowers who wish to refinance and take their mortgage elsewhere – they are asked to pay a loan exit fee. After July 2011, all borrowers will be paying more on their mortgage because exit fees will be built into the mortgage upfront.

Remember the highest exit fees are levied on borrowers who have chosen to fix their mortgage in order to secure themselves against future rate rises. These fees will remain in place after July 2011.

More Competition Between Lenders?

The main argument used by the government in support of exit fee abolition is that this will encourage more competition in the home loan space between lenders. All indications are that this will in fact lead to the death of a number of smaller lenders who will not be able to compete in the market without exit fees, making the big four banks even more powerful.

Once it happens it will be too late to turn the clock. This is something that needs to be addressed now.

Those in the know, including John Symonds (founder of Aussie Home Loans) and a number of large mortgage broking bodies are making their views very clear – abolition of exit fees will lead to increased power by the big banks and fewer smaller lenders.

Mr Symond has written to federal Treasury warning smaller lenders could be driven out because they will not be able to absorb the costs for setting up mortgages.

Mortgage aggregator the AFG, a broking body with $65 billion in home loans under management, has also warned the plan could thwart competition

Future for Mortgage Brokers?

Majority of mortgage brokers are today operating without charging their clients any fees. They are paid by the lender. While this has worked quite well over the years, going forward things may need to change.

It is important to note that if a client introduced by a broker decided to leave that lender in the first 12 months, in many cases the full commissions paid by the lender to the mortgage broker will be ‘clawed-back’. Brokers will find themselves doing a proportion of their loans for nothing.

While claw-backs have existed for some time, exit fees had precluded borrowers from frequent lender hopping. The proposed government legislation is likely to result in many brokers losing their commissions because borrowers may decide to refinance numerous times – it will cost them nothing to do so. In fact they stand to earn some money due to “cash back” incentives being offered by many lenders to borrowers who refinance to them.

Consequently mortgage brokers may need to introduce a compulsory fee for service. Should this occur the cost of a home loan to a borrower will increase by the amount of the mortgage broker fee.

In the meantime, the Australian Bankers Association, has warned that the ban on loan exit fees appears to be rushed and has not been accompanied by a proper analysis of the effect the measure would have on the economy or the market.

 

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