There is a lot of noise about changing banks and re-financing mortgages. Finance expert Anthony Bell tells us the exit fees involved and what his expert tips in evaluating the right financial decision for yourself.
When considering refinancing, in order to make an informed decision you need to:
1. Work out how much it is going to cost you to switch loans
2. Work out how much money you will save once you join your new lender.
3. Calculate what your exit fees and break costs are associated with the change.
Government driven banking reforms have started with a ban placed on exit fees for all new loans from 1 July 2011. The purpose of this reform is to assist in providing an increase in competition between banks.
Consumers will now be able to switch institutions without incurring significant penalties, hence increasing the level of competition.
This reform is for new loans written from 1 July 2011, many banks however, have amended their lending policy to also include existing loans prior to this date. Previously, exit fees could range from a flat fee of a couple of hundred dollars, to a tiered fee structure depending on the duration of the loan, up to a percentage of the loan amount for early release. If you are considering exiting from your current lending requirements it is prudent to review your original letter of offer as this will describe the related exit fees associated with your decision.
Break Costs, on the other hand, relate to a charge or penalties that a borrower would need to pay if a loan was paid out or refinanced prior to the fixed term being completed. This payment is by way of compensation to the lender, in this case your bank, as you originally agreed to pay them a certain fixed interest rate for a set period. As this is no longer the case, you would be compensating them for their economic loss on the interest amount that you promised to pay them for a period of time. This type of costs occurs when you a breaking a fixed interest rate loan.
Once you have established your costs you then need to determine how much you would save by switching lenders. How much will you save in interest each year and lower account fees?
Once you have the costs of leaving and the savings you will make by switching, you can then compare the two. If the costs of leaving mean it will take 20 years to recoup the expense you will probably find that this is not a viable option.
If however the cost of leaving means you will break even in the first year and then start saving money thereafter, it will most likely be a viable option to consider.
When making this decision, it is best to speak to your financial advisor so that they can provide you with a recommendation based on your personal circumstances.
by Anthony Bell www.bellpartners.com