McGrath’s Home Loans Division, Oxygen Home Loans, recently assisted a couple from Sydney’s Eastern Suburbs who wanted to refinance their loan.

The lender that Oxygen found for them had the most competitive fixed rate of 7.09 per cent for three years. The new lender also paid the client $700 after settlement as a cash bonus for switching to them. This couple will save $7060 per annum.

That’s serious money in anyone’s language.

And now, many other homeowners can also seek big savings like this due to the ban on mortgage exit fees. Effective from 1 July, refinancing or switching loans will be a lot easier and it’s a big win for the consumer.

In fact, it’s already easier to switch as the change in law has already resulted in huge competition for refinancing customers. The banks have launched an advertising blitz to lure borrowers away from their lenders now. Many of these deals include reimbursing the exit fees incurred by refinancing customers.

Oxygen estimates that, in the past, 1 in 10 of their customers were unable to refinance due to prohibitive exit fees on their existing loans. Today, the ban on exit fees is creating a lot of new enquiry.

I had a chat to Oxygen’s General Manager, James Green, who reports a big surge in refinancing enquiries “to take advantage of the unbelievable offers currently available”.

“There has never been a better time to look for a better deal and switch,” said Green.

There is a downside though. It’s likely that many home loans will become more expensive in the form of higher interest rates and fees because the ban will ultimately result in lost profits for the banks.

I asked Green for some expert analysis and here’s what he had to say.

“The ban has been great for competition and we’ve seen a lot of new bank advertisements encouraging people to switch lenders. In fact, some banks are even paying customers if they leave certain competitors and join them.

“However, the average cost of mortgages will increase because an increase in refinancing activity will make loans less profitable for banks and other lending institutions.

“The most profound effect will be the disappearance of discounted loans, which are subsidised loans with lower interest rates and exit penalties if a customer leaves early, say, within the first five years.

“Most non-banks specialise in these discounted loans and the ban on exit fees will require them to reinvent themselves. 

“The banks will need to originate more loans to make up for the lost business. To pacify shareholders, new money will have to be made elsewhere to make up for the reduced loan revenue generated per loan.

“Also, mortgage costs will need to be amortised over a shorter term because the average life of a loan, now 4.1 years, will likely be reduced as a result of greater refinancing activity,” says Green.

Based on everything he said, I’m encouraging homeowners to look at refinancing sooner rather than later.

Right now, competition is fierce and the banks are doing everything possible to win your business. Soon enough, they’ll start raising rates and fees in response to the lost revenue, so it’s best to act now.