Switching home loans
Refinancing your home loan to take advantage of a lower interest rate might save you money. Before you switch, make sure the benefits outweigh the costs.
Before you decide to switch
If you’re thinking about switching home loans, you’re probably focused on getting a better interest rate. But there are other things to consider before switching.
Ask your current lender for a better deal
Tell your current lender you are planning to switch to a cheaper loan offered by a different lender. To keep your business, your lender may reduce the interest rate on your current loan.
If you have at least 20% equity in your home, you’ll have more to bargain with. Having a good credit score will also help with negotiations.
Compare any loan they offer you with the other loans you’re considering.
Negotiate the length of the new loan
Some lenders will only refinance with a new 25 or 30 year loan term. You could end up with a longer loan term than the years left to pay off your current mortgage.
The longer you have a loan, the more you’ll pay in interest. If you do decide to switch, negotiate a loan with a similar length to your current one.
Weigh up the cost of lender’s mortgage insurance
If you have less than 20% equity in your home, you might have to pay lender’s mortgage insurance (LMI). This can increase the cost of switching and outweigh the savings you’ll get from a lower interest rate.
If you decide to switch, ask for a refund of some of the LMI from your current loan.
Compare the costs of switching your mortgage
Get at least two different quotes on home loans for your situation.
Check the average interest rate
Choose your loan and repayment types to see the average interest rate for new home loans. Interest rates have increased, so the average rate may now be higher.
Compare the fees and charges
We can help you find out what’s available.
Comparison websites can be useful, but they are businesses and may make money through promoted links. They may not cover all your options.
Compare these fees and charges:
| Fixed rate loan |
|
| Discharge (or termination) fee |
|
| Application fee |
|
| Switching fee |
|
| Stamp duty |
|
Smart tip: Ask the new lender to waive the application fee to get your business.
Check if you’ll save by switching
Once you have a short list of potential loans and the fees involved, use a mortgage switching calculator to work out if you’ll save money by changing home loans. It also shows how long it will take to recover the cost of switching.
Case Study
Simon and Tiana consider refinancing
Simon and Tiana’s fixed rate home loan period ends in a few months and their interest rate will increase. They decide to see what other lenders are offering.
They find two loans with a lower interest rate and the features they want.
Loan A has an application fee of $600 and Loan B has an application fee of $300. Simon and Tiana decide to pick Loan A because it has the lowest interest rate, which offsets the higher establishment fee.
By switching loans they will save $84,040 ($280 a month) over the life of their 25-year loan. They will recover the switching costs in five months.
Source:
Reproduced with the permission of ASIC’s MoneySmart Team. This article was originally published at https://moneysmart.gov.au/home-loans/switching-home-loans
Important note: This provides general information and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances before deciding what’s right for you. Although the information is from sources considered reliable, we do not guarantee that it is accurate or complete. You should not rely upon it and should seek qualified advice before making any investment decision. Except where liability under any statute cannot be excluded, we do not accept any liability (whether under contract, tort or otherwise) for any resulting loss or damage of the reader or any other person. Past performance is not a reliable guide to future returns.
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