Refinancing your home loan can be a strategic move to save money, but it’s not always as straightforward as securing a lower interest rate.
If you’re considering switching your home loan, you might be focused on securing a better interest rate. However, there are other important factors to consider before making this decision.
Before you decide to switch loans, it’s important to weigh up the costs and benefits to ensure it’s the right move for your financial situation.
This guide will help you understand the key considerations when switching your home loan in Australia.
Let’s Get Straight to the Point
Switching your home loan can save you money if done strategically. Before switching, negotiate with your current lender for a better deal and compare it with other loan options.
Be mindful of fees like break fees, discharge fees, application fees, and Lender’s Mortgage Insurance (LMI).
Use a mortgage switching calculator to see if the savings outweigh the costs. Always consider the loan term, interest rates, and total fees to ensure refinancing is worth it.
Ask Your Current Lender for a Better Deal
Before jumping ship to a new lender, negotiating with your current lender is often worth considering.
Let them know you’re considering switching to a more competitive loan another institution offers.
In many cases, they might be willing to reduce the interest rate on your current loan to retain your business.
- Negotiating power: If you have at least 20% equity in your home and a good credit score, you’ll have more negotiation leverage.
- Compare offers: If your current lender offers you a new deal, compare it carefully with other loans you’re considering. Look into various aspects like the interest rates, fees, and loan features.
Negotiate the Length of the New Loan
Some lenders may offer to refinance your mortgage but insist on a new 25—or 30-year loan term, which could be longer than the remaining term on your existing mortgage.
- Interest implications: The longer your loan term, the more interest you’ll pay. When negotiating a new loan, aim to match the term length with the remaining years on your current loan to avoid paying extra interest.
Consider the Cost of Lender’s Mortgage Insurance (LMI)
If you have less than 20% equity in your property, you may be required to pay Lenders Mortgage Insurance (LMI) when you switch loans.
This can significantly increase the switching cost and may even outweigh the potential savings from a lower interest rate.
- LMI refund: If you choose to switch, request a partial refund of the LMI from your current loan. Some lenders might accommodate this request, which could help offset the cost of switching.
Comparing the Costs of Switching Your Mortgage
To ensure that refinancing saves you money, you need to compare the fees and costs involved. Here are some key areas to consider:
1. Check the Average Interest Rate
When searching for a new loan, look at the average interest rate for new home loans in Australia. The Reserve Bank of Australia provides data on interest rates that can serve as a benchmark.
Remember that interest rates are subject to change, so checking current rates before deciding is essential.
2. Compare Fees and Charges
A mortgage broker or a comparison website can help you understand available options.
However, remember that comparison websites may be affiliated with specific lenders and might not show you the full range of available options.
- Fixed-rate loan break fee: If you’re on a fixed-rate loan, breaking the contract early might incur a break fee. Check with your current lender to see how much this fee will be.
- Discharge (or termination) fee: This is a fee charged when you close your current loan. It’s important to factor this into your total switching costs.
- Application fee: Most lenders charge an upfront application fee when you apply for a new loan. However, some may be willing to waive this fee to get your business, so don’t hesitate to ask.
- Switching fee: A switching fee may be involved if you choose to refinance internally with your current lender (switching to a different loan product).
- Stamp duty: Depending on your circumstances, you might have to pay stamp duty when refinancing. Consult with your lender to determine whether this applies to your situation.
Calculate the Potential Savings from Switching
Once you’ve shortlisted potential new loans and identified the fees involved, use a mortgage switching calculator to estimate your potential savings.
This tool helps you see if switching will save you money in the long run and how long it will take to recover the switching cost.
Steps to Check If You’ll Save by Switching
- Get multiple quotes: Obtain at least two quotes for home loans tailored to your financial situation. This will give you a broader perspective on what’s available and help you find the best deal.
- Calculate switching costs: Add up all the fees involved in switching, such as discharge fees, application fees, break fees, and LMI (if applicable). Subtract these from the potential savings of the new loan to determine if switching is worthwhile.
- Use a switching calculator: Employ a mortgage switching calculator to compare your current loan with the new loan options. This will give you a clearer picture of your potential savings and the time it will take to offset the switching costs.
Conclusion: Is Switching Your Home Loan Worth It?
Refinancing your home loan can be a smart financial move if done correctly. However, it’s crucial to consider all factors, including interest rates, fees, loan terms, and potential costs like LMI.
By carefully weighing these elements and using the right tools, you can determine whether switching will save you money.
Before you commit, negotiate with your current lender, compare multiple offers, and use online calculators to assess your savings. These steps ensure that you’re making an informed decision that aligns with your long-term financial goals.
Remember: Refinancing is a significant financial decision, so it’s always a good idea to seek professional advice if you’re unsure about the best option for your situation.
Frequently Asked Questions
1. Is switching my home loan for a lower interest rate worth it?
Yes, switching to a lower interest rate can save you money in the long term. However, you must consider all fees and use a mortgage calculator to see if the savings outweigh the switching costs.
2. What costs are involved in refinancing a home loan?
Refinancing costs can include discharge fees, application fees, break fees (for fixed-rate loans), and Lender’s Mortgage Insurance (LMI) if you have less than 20% equity. Be sure to calculate these before deciding to switch.
3. Can I negotiate my home loan rate with my current lender?
Yes, you can negotiate with your current lender. Let them know you’re considering switching, and they may reduce your interest rate to keep your business, especially if you have good credit and substantial equity.
4. How does Lender’s Mortgage Insurance (LMI) affect refinancing?
If you have less than 20% equity, you might need to pay LMI when switching to a new loan. This can increase the overall cost of refinancing, so factor it in when calculating potential savings.
5. How do I know if refinancing will save me money?
Use a mortgage switching calculator to compare your loan with the new options. It will help you see the potential savings and the time it will take to recover the switching cost.