If you want to save money on your mortgage, it may be time to switch to a new one. The process of switching home loans, or refinancing, allows you to take advantage of more competitive interest rates while finding a home loan that suits your latest needs.
In this article we’ll outline the different considerations to have when switching home loans to ensure that you actually save money.
If you spend 5 minutes searching up home loans online, you will probably find half a dozen loans with lower interest rates than what you have at the moment. It’s smart to always be on the lookout for better interest rates, but a great place to start is with your current lender.
Have a look at your lender’s website to see what home loans and rates they’re offering to new customers. If these new interest rates beat your rate, get in touch with your lender and request a lower interest rate. If you’re not much of a negotiator, Lendi’s Home Loan Specialists can negotiate on your behalf.
If you have a good credit score, at least 20% equity in your property and a demonstrated history of making home loan repayments on time, you are more likely to be approved for a lower rate.
A poor credit score can inhibit your chances of your lender giving you a lower rate. Read our article explaining how to improve your credit score quickly for tips on improving your situation.
There isn’t much reason to stay with one lender over the life of your home loan. Unless they consistently offer the best rates and home loan packages, don’t be afraid to look elsewhere.
The Reserve Bank of Australia (RBA) revealed earlier in the year that many banks charge customers a ‘loyalty tax’ by not passing on rate cuts. Compare your home loan online to see whether you can get a better interest rate here.
You may find that other banks and lenders offer better repayment platforms (e.g. simple mobile apps) or have better communication. While lender partners with all the major banks and traditional lenders, we also work with some exciting new smaller lenders — some of which operate exclusively online.
Don't pay more than you need to.
There are typically some costs involved in refinancing a home loan. To avoid fees, look for zero annual fee products or ask your broker to negotiate with the lender on this.
Lenders will typically charge an application or establishment fee when signing onto a new home loan. This fee can cost upwards of $200, but is often waived during promotional periods and many lenders won’t charge these fees at all.
Similarly, some lenders charge monthly or annual maintenance fees. Depending on your mortgage, you may be able to avoid these. Speak to your broker if you’d like to avoid standard application and maintenance fees.
While offset accounts and redraw facilities can save you money, there are typically fees associated with them. A fee for an offset account may be incorporated into your maintenance fees while you may be charged for accessing funds in your redraw facility.
Other fees can include:
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If you refinance your home loan to one with more flexible terms, you may be able to save money over time. For example, while a fixed interest rate home loan offers a sense of security and easy management, it comes with reduced flexibility. Most fixed rate mortgages either don’t allow or cap extra repayments. So, if you ever want to reduce your loan balance by paying extra one-off lump sums, you may be charged penalty fees.
Home loans with variable interest rates offer more flexibility and borrowers can make as many additional repayments as they like — without penalty. As the name suggests, variable rates change and fluctuate depending on the cash rate set by the RBA. While the cash rate is low, those with variable rate loans will benefit. The disadvantage is the risk of rising interest rates.
The advantage of making extra repayments is that the lower your loan amount, the less interest you’ll be charged. It can seem insignificant, but the savings can add up over time if you make a couple of extra repayments each year. For example, you could put your work bonus or tax refund towards your loan balance, reducing interest payable and putting you closer to owning your property outright.
Do you have a fixed rate home loan and would like to switch to a variable rate? Beware of break fees. Break costs arise when a homeowner refinances from their fixed rate loan before the fixed period is over.
Speak to your lender about whether you’ll be charged break fees for refinancing and how much you can expect to pay. Since fixed periods are usually 1-5 years, it may be more worthwhile to wait until your fixed period expires before refinancing.
An offset account or redraw facility can help you save thousands of dollars in interest. An offset account operates as a savings account linked to your home loan balance. Any funds in this account offset the interest charged on your loan. For example, if you have a loan balance of $200,000 with $30,000 in an offset account, you’d only be charged interest on $180,000.
A redraw facility operates similarly, except it pools your extra repayments and uses them to offset your loan balance. Unlike an offset account that allows you easy access to your funds, you may experience delays and fees if you want to access funds in your redraw facility. However, if used correctly, both loan features can save you interest.
Find out how much you could save each month.
When you’re planning on switching to a new mortgage, it’s crucial to think about how long you want to be paying off your mortgage for. A key deciding factor in this is working out how much you can afford to pay back each month. While a shorter loan term is an attractive option, you need to make sure that you can comfortably afford the higher loan repayments.
When you have a longer loan repayment term, your monthly repayment amount will be lower but you’ll be paying more interest on your loan amount over time. Speak to a Home Loan Specialist or financial professional to figure out what the best move for you is.
If you originally purchased your property with a deposit below 20%, it’s likely that you had to pay Lenders Mortgage Insurance (LMI). LMI can be charged again when you switch to a new loan if your equity is less than 20%.
A low Loan to Value Ratio (LVR) and a high home equity percentage can give homeowners more to bargain with when switching mortgages.
Your home equity is calculated by determining the difference between your remaining loan balance and your home’s updated market value. Equity is not fixed because of how dependent it is on a property’s value.
If you renovate your home, your property value may increase. In turn, your equity will increase. Changes in the property market, for example an area becoming trendy or high-growth, can influence your property value.
While refinancing, your lender will help organise an official property valuation. However, you can estimate your equity with our equity calculator:
Online home loan platforms like Lendi aim to make the refinancing process easier. We get the hard work done so that you can settle into a new loan stress-free. And since we work with over 35 lenders, you’ll have plenty of home loans to choose from.
With the support and guidance of our Home Loan Specialists, you can compare, apply and be approved for new home loans right in the comfort of your own home. Book an appointment with a broker to get started today.
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The information in this post is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.
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