Borrowers should be alarmed by Australian Bureau of Statistics figures that show refinancing has almost doubled during the past three years.

About 25 per cent of the mortgage loans written in the December quarter involved new loans written on existing assets, the ABS data shows. In some cases, these loans could cost the customer more in the long run.

The increase has been partly driven by a greater take-up of new lending products such as revolving lines of credit. But many in the sector believe the increase may be driven by the attraction of commissions and fees.

"Those involved in mortgage broking and selling loans are paid two ways – sometimes through a flat fee or through commissions which are linked to the size of the borrowings," says Sue Mahalingham, head of the Consumer Credit Legal Service in Perth. "In too many cases, we see the loan that’s recommended is the one that pays the highest commission."

A new loan of $200,000 can generate a commission of $1200, with some companies paying an ongoing trailing brokerage of 0.2 per cent, or $400 a year. This is similar to trailing commissions paid on managed funds.

Given the revenue base, it should be no surprise that financiers are keen to see as many loans as possible rolled into one and, at first glance, an interest rate of about 6 per cent will be attractive. In many cases, the consolidation can be driven by cash-flow needs and is a legitimate way of freeing up monthly payments to be redirected into other needy areas.

Nonetheless, consumers should realise that they may be paying much more in the long run. Let’s say you have taken a $20,000 car loan over a five-year term. If we assume an interest rate of 11 per cent, your repayments will be about $434.85 a month, with a total interest cost during the five years of $6091.

If you decide to roll your loan into a 25-year mortgage charging 6.25 per cent, the repayments will drop to $131.93, a saving of more than $300 a month.

While the lower interest rate will have some effect on the repayment amount, the real reason is that you have diluted the payments over 300 months instead of the original 60.

The total interest cost for your car loan will be a staggering $19,579 or nearly $13,500 more than where you started.

Also, you’re more than likely to be paying for the car long after you’ve disposed of it.

The best way take to advantage of the lower rate is to ask your financier to calculate how much you should be paying each month to ensure that the "car part" of the loan is repaid in the same time frame. As a rough guide, and certain to save you even greater interest, keep the same repayment level as you originally had.

In the above example, you would effectively save $416 in interest costs on that part of the loan and have it repaid seven months earlier if you maintain the $434.85 payment.

Finally, one last warning. Do your sums to work out the total costs of transferring.

The shorter the time to the loan’s maturity, the lower the saving, which means savings may be minimal if there are only a few months to go.

If the sole purpose was to save money, the application, stamp duty and valuation fees associated with the new mortgage, plus early-termination penalties from the car loan provider, may well exceed the $416 saved in interest.

DO YOUR HOMEWORK
Checklist before transferring:

Are the savings worthwhile?

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