by: By Anthony Keane From:news.com.au June 05, 2012 3:59PM
Housing values have sunk, below borrowers' loan amounts in some cases. Picture: File
FALLING home prices are making life tricky for property owners looking to refinance or invest, but it shouldn't stop people from getting the best mortgage deal.
New statistics from RP Data show capital city home values are down 5.3 per cent on a year ago, led lower by heavy falls in Melbourne and Brisbane, which have dropped 8.4 per cent and 6 per cent respectively.
While Treasurer Wayne Swan has been urging borrowers to switch lenders if they're unhappy with their loans, financial experts warn this move can prove costly if not planned properly.
The big challenge faced by many homeowners is falling equity. Some people who took out mortgages in recent years with relatively small deposits may find their loans are higher than their property values.
"Equity is the difference between your home loan balance and what the property is worth," says RateCity consumer advocate Michelle Hutchison. "Let's say you purchased a property for $400,000 with a 5 per cent deposit - $20,000 - so your home loan balance is $380,000.
"If a year later your home is worth only $380,000 and your loan balance is $370,000, your equity has dropped to 3 per cent. So if you wanted to switch lenders, it would be difficult to find a better deal, plus you would have to pay lenders mortgage insurance again."
This type of insurance protects the lender - not the borrower - from loan default for mortgages where the deposit is smaller than 20 per cent. It typically costs a few thousand dollars, added to the initial loan balance.
QBE LMI is one of the nation's biggest mortgage insurers and its chief executive, Jenny Boddington, says the recent home price falls have not been heavy enough to spark a jump in claims.
"We don't see any need for there to be a fundamental major fall in house prices but there's a lot of confidence involved," Boddington says.
She says people with repayment issues should talk with their lender as early as possible.
Assist Finance chief executive Jason Di Iulio says don't be afraid to ask for a better deal.
"Banks are very amenable to negotiating rates," he says. "There are lots of professional packages and discount packages available to borrowers of up to 0.9 per cent of the standard variable rate."
Di Iulio says falling property prices have made it tougher to refinance, particularly for investors who often use their own home's equity as security for more loans.
"The ability to refinance is being curtailed by a tightening lending market," he says, adding that all borrowers should keep an eye on their property's value and have a plan.
"Is it your plan to keep hold of the property in the long term or to speculate?"
