Refinancing Homeloans Regularly for Honeymoon Rates

• 

  tomleonhart on 24/11/2015 - 11:08

  +1

  All the question you're asking come down to personally circumstances.

  I wouldn't refinance every year, fee would eat into the calculated saving, every 2 -3 years maybe. Paperwork is a pain to to refinance every year too. And what price do you put on convenience?

  • Bigger banks with more ATM will be easier to get cash out.
  • Direct deposit has to be changed.
  • Bank details has to be changed.

  If none of these matter to you and it's free to refinance, then go ahead I'd say if you have the time. Diligent always pay off :)

• 

  naritas on 25/11/2015 - 10:02

  Would it affect credit ratings to be regularly switching loans?

  In short, yes. However, this is not necessarily going to be a major issue if your credit score is in the good to excellent range. Also, the effect will be relatively minor, especially if you are not shopping around and getting multiple enquiries from lenders each year when you are evaluating your options.

  What am I not considering?

  Value. There is literally no value in it. The cheapest 1 year rates are around 3.5%p.a. - the cheapest 2 year rates are around 3.69%p.a (you can check out a comparison here: https://www.naritas.com.au/widgets/rates-widget/?t=hl). By the time you factor in establishment costs (which typically are $300-700 inclusive of government charges) and exit costs from your existing loan (which are typically $350-500 as standard and are typically $1000 for exit from honeymoon and 1 year fixed products) you'd often work out ahead taking a 2 year fixed.

  Hassle. Assuming you can make a saving, then you need to move accounts and mortgage registrations (which usually present multiple opportunities for mistakes), go through the application process (which can be rather laborious) and review loan contracts and T&Cs once an offer is made. As such, the common experience is for people to refinance or restructure every 5 years. Bargain hunters often shave this down to a review every 2 to 3 years.

  High revert and variable rates. One of the most common ploys of lenders offering really cheap 1 year fixed products is to roll the applicant on to their standard variable or a relatively expensive variable at the end of the term. This acts as a proverbial 'lazy tax' so that if you end up getting too busy to enact your plans, they'll ultimately make back the profit they lost in giving you the discounted rate to start with (which is the main reason they offer honeymoon rates). Also, you'll often find that the very cheapest offers have a number of fees that apply to switching and daily account operation. As such, the headline interest rate may look cheap - but if you were planning on doing redraws or switching products, be prepared for charges that far exceed regular market costs.

  Uncertain future outcomes and exit costs. Following on from high revert and variable rates is the fact that you'll probably be forced to make a move in 12 months. Assuming your options on the market and the costs you will encounter from the lender will be the same as what it is today is a rookie move. Remember credit criteria and fees & charges are always subject to change. This is why sensible borrowers choose reputable lenders who have a track record of delivering at a certain price point. For example, a Newcastle Permanent or ING, they may not always be the absolute cheapest - but they are typically very close to it and they don't have a reputation for throwing in egregious rate rises or fees like some small lenders do. They're also generally reliable and reputable organisations that are ADIs - which is extremely important if you are putting funds into an offset account. ADIs carry the commonwealth guarantee on deposit funds - whereas non-ADIs do not. Lastly, don't forget the exit cost estimate quoted today is not necessarily the charge that you will encounter in future. Many lenders charge 'reasonable administrative costs' for exit. Those can be subject to change. Not typically by 100%, but an extra $100-200 is justifiable by the lender depending on the wording they use in your loan contract. Major lenders usually try to avoid such tactics due to the negative PR, smaller lenders/honeymoon products with large discounts are not above such tactics to recoup lost margins.

  Hope this helps.

  • 

    saxlady on 25/11/2015 - 10:16

    Thanks for your reply - I did mention in my OP that I'm aware of fees, and well duh!! of course the situation won't look exactly the same in a year! If you're planning on having more kids or changing jobs or course you wouldn't consider it - but if you think you're pretty stable and it might help you pay down your loan faster then I think it looks like a pretty good option.
    I'm pretty aware of looking for ongoing costs and so forth but your comments are perhaps helpful for someone else reading this later on who is looking into this for the first time.

    In this community - it would surprise me that people would not be willing to go through paperwork yearly etc, a few hours work for a return of a few thousand dollars difference for the loan - I would have thought that was a no brainer.

    ADIs and offset accounts - I wasn't aware of this, and good to consider - thanks.

    • 

      naritas on 25/11/2015 - 10:28

      You're welcome. You can see a list of ADIs here: http://www.apra.gov.au/adi/pages/adilist.aspx

      In this community - it would surprise me that people would not be willing to go through paperwork yearly etc, a few hours work for a return of a few thousand dollars difference for the loan - I would have thought that was a no brainer.

      I think it is because for the average person there is no way you'd save a few thousand dollars. The cost of interest between 3.5%p.a. for a 1 year to 3.69%p.a. (for a 2 year loan as an alternative) - is $950 on a $500,000 loan. That is before you factor in all of the costs such as government charges and lender exits/establishments.

      Speaking from the perspective of being finance brokers - 1 year fixed products are rarely a sensible option for anyone who is borrowing less than $1mil (at that point, and beyond, the charges started to pale in significance to the interest savings) and typically people who are borrowing such amounts are reticent to go through the headache of switching so frequently.

      Hope this helps.

      • 

        saxlady on 25/11/2015 - 10:35

        this makes sense - and I guess it's where you just do your own sums and look at your own situation.

        To be fair - I am making an assumption that in a year there would be cash back offers attached to new deals, or options to have fees waived, as there are now which you'd do your sums and make sure it all pans out to save you money. I've had loans for quite a while now - and I can't remember a time when there weren't attractive offers. As a broker you might have more to add on this?

      • 

        naritas on 25/11/2015 - 11:02

        +1

        this makes sense - and I guess it's where you just do your own sums and look at your own situation.

        Absolutely, we've assisted people with such strategies as there will be some people this can make sense for (typically $1mil+ borrowers with extremely stable employment/strong credit score and an LVR of 70% or less with a cheap property to value). Sincerely, however, this is a very limited bunch of people due to the reasons listed in our earlier post.

        As a broker you might have more to add on this?

        There's no such thing as a free lunch when it comes to financial services - so it's imperative to read the fine print and understand where the pitfalls of a strategy like this lay (which is why honeymoon offers exist vis a vis it's not because lenders want to give away cheap money).

        With respect to cash back offers, the cash back offers right now are some of the best that we've seen in over a decade - and this is speaking from the perspective of having over 140 brands on our panel. So it's not a wise idea to assume they'll automatically be available in future. If you are consistently having such offers made to you, it may be because you have an extremely strong credit profile. Typically, however, there is some catch associated with cheap rates and rebates. At the best end of the spectrum the catch is that you need to have an extremely strong credit profile to qualify for approval. Those offers are designed to attract premium borrowers and if you fall into that elite category the pickings are ripe right now. An example of such an offer is this one: https://www.naritas.com.au/latest-news/3-69p-a-cr-na-mortgag… (tough credit criteria - you need excellent repayment history, strong collateral and strong employment history, but you get a great price and rebate)

        At the worst end of the spectrum, the lender is simply playing games to draw people in and then raise their fees, rates and charges. This is descriptive of the stories that you read online of the bottom 50% of the credit score bell curve (who couldn't qualify for a cheap rate bc of tough criteria). The hallmarks of this type of offer are the ones that you see coming via 1 year 'honeymoon rates' from micro lenders. Also, there is a number of 'online lenders' who aren't actually lenders at all. They are originators who are trying to shift c-grade wholesale funds from non-ADIs. People need to be super careful to take the time understand such offers as, more often than not, the offer is designed to make profit outside of the headline interest rate.

        Hope this helps.