Thinking about refinancing your home loan? Here are your options
Whether you’re paying a higher interest rate than you’d like or your current home loan doesn’t offer the features you need, it would be a mistake to stick with it. Unfortunately, many Australians are unaware of their options and wind up doing just that. If you feel your home loan isn’t up to scratch, here are a few things you can do.
Switch to another loan from the same lender
One option is to stick with your lender but switch to another offering of theirs. To start, browse the products listed on their website to find ones with lower interest rates, greater flexibility, or access to more features. If you spot one you like it could be worth giving your lender a call to see what they can do.
If you’re currently paying off a variable rate loan, you might also want to consider switching to a fixed one. Since March, the majority of cuts in the market have been levelled against fixed rates, bringing the average 2-year option down to 2.54% p.a. Meanwhile, the average variable rate trails behind at 3.38% p.a.
Locking in a fixed rate can be a shrewd financial decision, especially considering official interest rates are likely to remain at their current levels for some time. Just keep in mind that once the fixed term expires, your loan will revert to a slightly higher variable rate.
Negotiate a lower rate
Another option is to simply ask your lender for a lower rate. It’s generally a good idea to review your interest rate every so often anyway to make sure you’re getting the best deal. While this may seem daunting, you’d be surprised how straightforward the process can be.
The first step is to familiarise yourself with the rates offered by competitors (here’s where our home loan comparison page can help). When comparing options, make sure to narrow your search to loans similar to yours. For example, if you’re with Westpac, see what the other big banks are offering. And if you have an investor loan, don’t compare it to ones for owner occupiers.
It also pays to know what your lender is currently offering to new customers. Chances are it’s a better rate than you’re paying — after all, new customers have to be enticed, while banks are betting that some combination of loyalty and complacency will keep longtime customers from leaving.
Once you’ve done that, the next step is to call up your lender and let them know you’re dissatisfied with your current rate. Often banks will throw out a small discount hoping it will be enough to keep you on board. But if it falls short of what you’re after, don’t give up. Present the findings from your research and ask if they are willing to match them.
To really show you mean business, ask your lender for a discharge form. If you’re not already speaking to a member of the customer retention team, you’ll be on the phone with them soon enough, at which point you should reiterate your intention to leave unless you get the discount you’re after.
How can you improve your chances?
Depending on your financial position and the type of loan you have, you might be better placed to secure a discount than others. Below are a few things that lenders look for when deciding whether to grant borrowers a lower interest rate.
- If you are an owner occupier, rather than an investor
- If you are paying principal and interest, rather than interest only
- If you have a good credit history and haven’t missed any repayments
- If you are working full-time
- If you own 20% or more of the property
Refinance to another lender
If your attempts to negotiate a better rate with your current lender have been less than fruitful, it might be time to part ways. While refinancing to a cheaper lender might involve some extra fees and forms, it can be worth it if you’re able to save on interest in the long run.
To illustrate, say you’re 10 years into a 25 year mortgage with $300,000 left to pay. If your interest rate is 3.50% p.a., you’ll be making monthly repayments in the range of $2,145, and over the next 15 years you can expect to pay around $86,037 in interest.
If, however, you switched to a loan that comes with a variable rate of 2.50% p.a., the amount you’d pay each month would drop to around $2,000, and you’d pay $60,066 in interest over the remainder of the loan. That equates to savings of $25,971.
RELATED: 94% of mortgage holders could be losing out by failing to switch
At the same time, it pays to be aware of the downsides. For one, there’s a chance refinancing will impact your credit score. This is because each time you take out a new line of credit, a provider will conduct what’s known as a hard pull credit inquiry, which then appears on your overall credit history.
A single hard inquiry isn’t anything to be concerned about, but if too many are made over a short period of time you risk jeopardising your credit rating. To get around this problem, make sure you research all your available options upfront and only apply to a small number of lenders once you’re confident they’re right for you.
What about fees?
While the overall goal of refinancing is to save money, it’s not unusual for a few fees to pop up along the way. These can include:
- Discharge fee. Your old bank or lender may charge you a fee to terminate your existing home loan early.
- Break fee. If you’re refinancing from a fixed interest rate home loan, your old lender will most likely charge you a break fee.
- Application fee. Since refinancing involves signing up for a new home loan, you may be sprung with an application fee.
- Valuation fee. Your new lender may want an up-to-date valuation of your property, which you’ll have to pay for.
- Settlement/legal fee. Once everything is settled, you may have to pay a settlement or legal fee.
If you want to compare what’s on the market, visit our home loan comparison page, where you’ll be able to filter your search by rate and type. And to get an idea of how much you could be saving, compare your lender’s interest rate with a competitor’s using our switch and save calculator.
Home loan comparisons on Mozo - page last updated October 24, 2020
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