Paul's Insights: Two out of five home owners could be missing out on savings

Two out of five home owners are in the dark about how refinancing works and that can mean missing out on the savings of a more competitively priced mortgage.

The home loan market is super competitive right now, but there’s still a big variation in loan rates. With some of the smaller lenders you can pay less than 3%.  If you have your mortgage with one of the big banks, chances are you’re paying closer to 4% or more.

It’s possible to close this gap by approaching your lender to ask for a better deal. But most lenders save their best rates for new customers. That makes it a no-brainer to check your home loan rate to see if you could do better elsewhere.

The big stumbling block, according to a recent Westpac report, is that 41% of home owners don’t know how refinancing works.

To set the record straight, refinancing just means taking out a new home loan to replace your current loan. It involves filling out a loan application and providing details about your pay and household spending. Instead of evidence of savings, lenders will want to see several months’ worth of home loan statements showing regular repayments. If the new loan is approved, your old loan is paid out, and your regular loan repayments are made to the new lender.

It can be a relatively hassle-free process. The catch is that refinancing comes with costs including loan application and valuation fees. As a sign of how competitive the market is, many lenders will waive these fees to attract your business. This is definitely something to ask about.

The deal breaker can be lenders mortgage insurance (LMI). This applies if you plan to borrow 80% or more of your home’s market value. LMI isn’t portable between lenders, so you can still be slugged for LMI even if you paid a premium when you first purchased your place. And the cost can run into thousands of dollars.

In Sydney and Melbourne, home owners who purchased with a small deposit at the height of the property boom, could find they don’t have sufficient home equity to meet the 20% benchmark it takes to avoid LMI. If that sounds like you, refinancing may not stack up financially, and your best bet to save on repayments, could be to negotiate hard for a better rate with your current lender.

Paul Clitheroe is Chairman of InvestSMART, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.