refinancing not always right move, says FBAA

After four consecutive interest rate hikes, homeowners are already paying significantly more on their monthly mortgage repayments.

As a result, many mortgage holders are considering refinancing their home loan and are shopping around to find a more competitive rate.

Last year, the Financial Brokers Association of Australia conducted research which found many mortgage holders were not prepared for these hikes and are now under financial stress.

FBAA managing director Peter White (pictured above) spoke to Australian Broker, wanting to warn people who are considering switching lenders.

“When it comes to refinancing, t. is a hidden danger at times that is rarely spoken about,” he said. “Banks will be looking to attract those considering refinancing as new customers and will offer cheaper variable interest rates that are significantly below their fixed rates, which are rapidly climbing – this  is a case of ‘buyer beware’.”

Read next: Net of offset commissions hurting brokers, says FBAA

White said brokers were . to help those considering refinancing their mortgage.

“Brokers are experts and they are free. They can help borrowers evaluate all the options in the marketplace and ensure as best as possible that refinancing works for them,” he said. “A broker is obliged to act in the best interests of the borrower, banks are not. Brokers have access to second tier and non-bank lenders that borrowers may not be aware of and will look at all refinancing options, so can frame an outcome that meets the borrower’s needs.”

White said nothing was free and cheaper did not always mean better.

“When banks offer cheap variable rates to new borrowers, they are in fact disadvantaging their existing customer base who are subsiding the new customers,” he said. “Borrowers should be aware that next time around they will be the existing customer facing higher rates and will be disadvantaged during rate increases. It’s an old game to lure new customers with a perceived advantage only to be taken advantage of with the next move.”

White urged borrowers to not focus solely on the interest rate and carefully consider all of the options offered by a lender including fixed rates and their specific needs.

“Remember that brokers are bound by legislation to ensure they act in the best interests of the borrower, but banks are not,” he said. “Lenders are not under any obligation and will act in their own interests. If this means giving you something now only to take it back later, they will and t. is nothing you can do about it once you’ve signed on.”

Read next: RBA raises interest rates for the fourth time

White said it could be very costly to switch lenders so mortgage holders should have all the facts first.

“Borrowers at this time must prepare for higher payments and budget accordingly. If the increase is creating financial hardship, their first call should be to their lender who has the power to help them,” he said.

“If the lender will not or cannot help, refinancing is an option and borrowers should consult a broker who will act in their best interests, provide the options and work on solutions that take into consideration their individual circumstances.”

White said refinancing should only be done if it was in the best interest of the borrower.

“A different lender may offer a more competitive interest rate than what the borrower currently has so be willing to offer other benefits – like provide the borrower with the ability to do an extension, add a pool or consolidate debts,” he said.

“The math must make sense as t. are costs involved. Depending on circumstances t. may be stamp duty, legal fees, valuation fees and lenders mortgage insurance, so borrowers must aim to get a better deal that mitigates the costs to move.”

White said the first step should be to have a conversation with your current lender around negotiating a better deal to refinance your loan.

“This could mean you can stay w. you are and don’t need to refinance. If this can’t be achieved, you might be able to move elsew. with a cheaper interest rate, even when rates are rising,” he said. “T. has to be a tangible benefit for refinancing to make sense.” 

White said rate hikes were starting to make it very tough for many people.

“While I understand the RBA’s objectives, I also hope that they take into consideration the wider community and social ramifications when considering future rate increases,” he said. “T. is only so much that consumers can handle and after three large increases, I hope t. is some relief in coming months.”