Borrowers may think of refinancing

The Australian has reported that home owners are expected to swamp banks trying to refinance from high fixed-rate mortgages after Tuesday's 25 basis point interest rate cut.

Unfortunately borrowers that try to get rid of high fixed-rate loans will face hefty 'break fees' which could be more than $20,000 on a $500,000 home loan.

Martin North Fujitsu's Consulting Managing director has stated that banks had earned $899 million in home loan fees in 2007, with Fujitsu estimating that this will rise to more than $1 billion this year. He further added that break fees made up of a comparatively small change to exit the loan plus a bigger fee that is the economic cost to the bank of losing the business, had become a bigger proportion of housing loan fees in recent years.

The Housing Industry Association called on banks to drop severance and other refinancing charges from fixed rate loans, but banks were unlikely to do so.

Chris Lamont HIA'S chief executive stated that banks would be swamped with borrowers trying to refinance. Mr. Lamont pointed out that a home loan taken out early last year when mortgage rates were 7.5 - 8 per cent would cost a borrower about $670 a month more on a $250,000 mortgage, than a loan taken out to-day.

He also added that Tuesday's drop in the cash rate would have little impact on the housing market, even if passed on by the banks, as buyers already believe that mortgage rates are reaching the bottom of the cycle. Mr. Lamont also felt that falling interest rates were now being overshadowed by the availability of finance, with the banks asking for higher deposits, particularly from first-home buyers.

Real Estate agents are reporting increased home sales, particularly for lower-priced property, with Australia's biggest agent, Ray White making $2.37 billion of sales last month, a 15 per cent rise on the same month last year.

Despite the federal governments call for official rate cuts to be passed on to home owners, the National Australia Bank has kept variable mortgage rates on hold citing increased funding costs as their reason.

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Published on April 4-th, 2009 in Home Loans
Damon Rasheed is the CEO of Rate Detective, an Australian financial service comparison sites specialising in Life Insurance, Income Protection Insurance and home loans. Damon holds a Master's Degree in Economics from the University of Melbourne and has been involved in many start-up internet businesses.

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