Exit fee ban to go ahead, but more can be done to increase lending competition
June 27, 2011 (PRLEAP.COM) Business NewsJune 27, 2011, Sydney Australia's best financial comparison website RateCity (www.ratecity.com.au) has welcomed the decision by the Senate yesterday (June 22, 2011) to keep the banning of early exit variable mortgage fees in place from July 1, 2011.
Damian Smith, RateCity's CEO, said that while abolishing early exit fees would help some borrowers switch to better deals without being penalised, more can be done to improve other heavy costs associated with switching mortgages.
"Banning early exit fees on variable home loans will not impact the entire mortgage market because there are other fees and charges which will deter many borrowers from switching. The most significant cost of switching lenders for many borrowers is Lenders Mortgage Insurance (LMI)," said Mr Smith.
"All lenders charge LMI if you want to borrow 80 percent or more of the value of the property. It covers the lender – not the borrower – in case you default on your mortgage. The problem with LMI is that if you switch to another lender the LMI policy is cancelled and you'll have to pay for a new policy with your new lender, which can be very costly.
"For instance, for a $300,000 property and a 10 percent deposit, borrowing $270,000 would incur LMI costs of about $4,500. And the more you borrow, the greater the cost as a $600,000 property with a 10 percent deposit would mean an LMI fee of about $17,500.
"There are two major LMI providers in Australia – QBE and Genworth Financial. So there's a big chance you're paying for same policy, for the same property, to the same insurance provider!
"Whether it's added to the loan balance or paid up front, these costs can outweigh the value in switching lenders," he said.
Mr Smith said banning early exit fees on variable home loans was a step in the right direction towards improved competition in the home loan market.
"The banning of early exit fees for new variable home loans from July 1 will see one less barrier for borrowers to hit if they're not happy with their mortgage or lender. While we won't necessarily see the real impact of the exit fee ban until 2012, it will no doubt open the door for more borrowers to be able to switch if they choose to," he said.
"When more borrowers are switching lenders and refinancing their mortgages, this will drive lenders to compete harder to retain their customers and attract new ones."
Mr Smith's tips on switching home loans:
RateCity's top variable home loans and their advertised rates, as at June 23, 2011
1. Loans.com.au, Dream Loan Express – 6.58%
2. Better Options Home Loans, Advantage Plus Variable <$2m – 6.59%
3. Mortgage Port Management, Essential – 6.69%
4. eMoney, Full Doc Variable Pro Pack – 6.71%
5. Collins Home Loans, Variable – 6.72%
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