THE ongoing volatility in interest rates has generated the predictable hype about borrowers taking matters into their own hands and switching lenders.
Unfortunately in most cases changing lenders is like swapping spouses - an expensive exercise with no guarantee that the outcome will be an improvement.
The main stumbling block is mortgage insurance, which is compulsory if the loan to valuation ratio (LVR) is more than 80%.
Think about a couple who are considering buying their first home, and who wish to borrow $570,000. They have been attracted by all the huge newspaper advertisements and decide to go to Lender A because that institution is offering the cheapest rate.
They have only 5% deposit so the LVR is 95%, - they have not even given a thought to what the mortgage insurance premium may be.
The lender they choose charges them a premium of 3.9% or $22,230 and they happily sign up. They have no idea that another lender, possibly offering a slightly higher interest rate, may offer them the same loan but with a mortgage insurance premium of 2.41% or $13,737 -a massive $8,493 difference.
Of course, the government gets into the act as well and adds a hefty sum for stamp duty which ranges from 5.37% in Queensland to 11.8% in South Australia.
The mortgage insurance and stamp duty is invariably added to the loan which means they will be paying it off over the life of the loan.
After a couple of years our young couple find that their chosen lender has elected to increase interest rates to a level which is higher than most of its competitors.
Even though their house may have increased slightly in value, their LVR is still going to be 95% because the loan has been increased by the mortgage insurance premium and stamp duty. To their horror, they discover that the new lender will want fresh mortgage insurance - they will be up for another lot of fees which would be at least $13,737, even if they chose the cheapest premium on offer.
It would be most unlikely that they could obtain any refund of the original mortgage insurance premium.
Noel Whittaker is a co-founder of Whittaker Macnaught Pty Ltd. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. His email is firstname.lastname@example.org
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