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 are rising, 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

  • If you are on a fixed rate loan, you may need to pay a break fee.

Discharge (or termination) fee

  • A fee when you close your current loan.

Application fee

  • Upfront fee when you apply for a new loan.

Switching fee

  • A fee for refinancing internally (staying with your current lender but switching to a different loan).

Stamp duty

  • You may be liable for stamp duty when you refinance. Check with your lender.

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 the 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.

Mortgage switching calculator

Check out how much you’ll save by changing home loans.

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.

Contact us today for more information.

Reproduced with the permission of ASIC’s MoneySmart Team. This article was originally published at https://moneysmart.gov.au/home-loans/switching-home-loans

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