Have you considered refinancing or switching home loans to manage your monthly repayments better? You’re not alone. According to the Australian Banking Association (ABA), 2370 Aussie homeowners refinance their home loans every working day, and 70% of them are switching their mortgage to another bank.
Refinancing your home loan for a lower interest rate might save you money. However, before you decide to switch, it’s essential to ensure the benefits outweigh the costs. While many homeowners focus on getting a better interest rate, there are various factors to consider before making a decision on whether or not to transfer your home loan to another bank.
In this guide, we’ll explore the key considerations and steps involved in changing home loans. From identifying your purpose for refinancing and understanding your financial situation to negotiating with your current lender and comparing new loan options, Q Financial will cover everything you need to know to navigate the refinancing process effectively.
What Are the Common Reasons for Refinancing?
Understanding the common reasons for a home loan switch can help you decide whether refinancing your home loan is the right move for you. Below are the typical reasons people change home loans:
- Lower Interest Rates: Refinancing to a mortgage with a lower interest rate can save you money on your monthly repayments and reduce the total interest paid over the life of the loan.
- Better Loan Terms: Switching to a new loan can offer more favourable terms, such as changing from a fixed rate to a variable rate loan or vice versa. This flexibility lets you choose loan terms that are better aligned with your financial goals and market conditions.
- Access to Additional Features: Many homeowners switch home loans to access additional loan features – such as flexible repayment options – that their current mortgage may not offer.
- Better Lender: Poor customer service or unfavourable loan conditions with your current lender can prompt you to seek better options. Changing to a mortgage lender with a better reputation for customer service and more competitive loan products can improve your overall borrowing experience.
- Changing Financial Circumstances: Refinancing can help you adjust your mortgage to better match your new financial needs during life events such as marriage, having children, or retirement.
- Debt Consolidation: Switching home loans can be done to consolidate debts with high interest, such as personal loans or credit cards, into just one loan: your home loan. This can make it easier for you to manage your debts.
What Do I Need to Consider Before I Refinance My Home Loan?
Before deciding to switch your home loan, you need to check the following aspects of your financial situation. This way, you can make a well-informed decision and ensure that refinancing will benefit you in the long run.
Financial Situation
- Income and Expenses: Evaluate your current earnings and expenses to see if you can manage your monthly mortgage repayments. Consider any future changes to your income or expenses that could affect your capacity to pay off the loan.
- Future Financial Goals: Reflect on your long-term financial goals, such as funding your children’s education, saving for retirement, or making significant investments. Ensure that refinancing aligns with these goals and helps you achieve them.
Credit Score
- Impact on Refinancing Terms: Your credit score influences the interest rate and terms you qualify for when refinancing. A higher credit score can help you secure lower interest rates and better loan terms. On the other hand, a lower score may limit your options. Therefore, it’s crucial to check your credit score and improve it if necessary before applying for a new loan.
Loan-to-Value Ratio (LVR)
- Significance and Implications: The Loan-to-Value Ratio (LVR) is the percentage of your property’s value that you owe on your home loan. Lenders typically prefer an LVR of 80% or lower, as this reduces their risk. If your LVR is above 80%, you may need to pay Lenders Mortgage Insurance (LMI), which can increase the cost of changing home loans.
Current Loan Terms and Features
- Fixed Rate Terms: If your current loan has a fixed interest rate, check when the fixed term ends. Refinancing before the end of the fixed term may incur break fees, which can add to the cost of switching loans.
- Repayment Options: Consider whether your current loan allows you to make extra repayments or switch between different repayment frequencies (e.g., weekly, fortnightly, monthly). Flexible repayment options can help you handle your mortgage more effectively and reduce interest costs over time.
- Loan Features: Evaluate the features of your current loan, such as redraw facilities and offset accounts. These features can provide additional flexibility and opportunities to save money. When comparing new loan options, ensure that the new loan offers similar or better features to meet your needs.
Should I Switch My Mortgage to Another Bank, or Should I Stay With My Current Lender?
In truth, it is worth considering switching mortgage lenders if you can find a better deal elsewhere. There are thousands of home loans available on the market, and your lender’s competitors are becoming more competitive when it comes to their loan products.
For one, you could get up to $6K in cashback when refinancing a home loan! This incentive can help cover the costs of switching home loans, such as application fees and legal costs, and can also provide borrowers with additional funds to use as they see fit. There are also better home loan refinance rates right now in the market (ask us to see how your current rate stacks up against the current market rates!).
So, it’s possible that at least one of them could offer you a lower interest rate, lower fees, more flexible repayment options, or better features than your current mortgage. And if your existing provider won’t offer you a discount or some sort of compromise to help you manage your mortgage better, it could be time to consider switching your mortgage to a new provider.
But before making any concrete moves, aside from the considerations discussed in the previous section, there are key factors to weigh up to determine whether to switch your mortgage to a different bank or stay with your current one:
Interest Rates
- Lower Rates with a New Lender: Switching your home loan to another bank could offer a lower interest rate.
- Negotiating with Your Current Lender: Sometimes, simply informing your current lender of your intention to switch can result in them offering a better rate to keep your business. This can save you from the hassle of switching while still enjoying financial benefits.
Fees and Costs
- Refinancing Costs: Changing your mortgage lender involves various costs, such as application, discharge, and potential break fees if you’re on a fixed rate loan. Make sure to fully understand all the costs involved, including hidden charges.
- LMI: If you have less than 20% equity in your home, switching lenders may require you to pay LMI again, which can significantly increase the overall cost.
Loan Features and Terms
- Additional Features: New lenders might offer better features like offset accounts, redraw facilities, or more flexible repayment options.
- Loan Term: Be cautious about extending your loan term with a new lender. While a longer term can reduce monthly repayments, it often results in paying more interest over the life of the loan.
Market Conditions
- Competitive Market: The current market may have more competitive offers due to low interest rates and banks vying for new customers switching home loans. This competition can result in favourable terms and incentives, such as cashback offers.
- Future Rate Changes: Consider potential interest rate changes and how they might affect your repayments. Locking in a lower rate now might be beneficial if rates are expected to rise.
Customer Service
- Service Quality: If you’re unhappy with the service from your current lender, switching to a lender with a better reputation for customer service might improve your overall experience.
- Support and Communication: Transferring your home loan to a lender with good customer service can make managing your mortgage easier and provide peace of mind, especially during times of financial uncertainty.
Cost-Benefit Analysis
- Potential Savings: Use a mortgage switching calculator to estimate how much you could save by refinancing after accounting for all fees and costs. Ensure that the savings outweigh the expenses involved in switching.
- Break-even Point: Determine how long it will take to recover the costs of switching through savings on your new loan. If the break-even point is too far in the future, it might not be worth switching.
How Do I Negotiate with My Current Lender?
If you decide to negotiate with your existing lender, here’s how you can approach the negotiation process to potentially secure a lower interest rate or improved loan conditions, saving you time and money:
Requesting Better Terms
- Prepare Your Case: Before contacting your lender, gather information about your current financial position, including your income and expenses, present interest rate and loan terms, and any changes in your financial goals.
- Do Your Research: Research the interest rates and loan features offered by other lenders. This gives you a benchmark to use during your negotiations and demonstrates that you are informed about the market.
- Initiate Contact: Reach out to your lender and inform them that you are considering switching to another lender due to better offers available in the market. Be clear about what you seek, whether it’s a lower interest rate, reduced fees, or additional features.
Leverage
- Use Your Equity: If you have significant equity in your home (at least 20%), use this as leverage. More equity typically makes you a lower-risk borrower, which can encourage your current lender to offer better terms to retain your business.
- Highlight Your Credit Score: A good credit score can be a powerful bargaining tool when switching home loans. Lenders are more likely to offer you favourable terms if you have a high credit score, as it indicates you’re a low-risk borrower. Ensure your credit report is accurate and updated before negotiating.
- Show Competitor Offers: Present the offers you have received from other lenders. Showing concrete examples of better rates or terms can motivate your current lender to match or beat those offers to keep you as a customer.
Potential Outcomes
- Improved Terms: If your lender offers better terms, review them carefully. Ensure they align with your financial goals and provide your desired benefits. If the offer is satisfactory, you can avoid the hassle and costs associated with switching lenders.
- No Change: If your lender does not offer improved terms, you must decide if it’s worth switching to another lender. Carefully consider the potential savings, costs involved in switching, and whether the new terms from another lender are significantly better.
- Re-evaluation: Sometimes, the negotiation process can serve as an opportunity to re-evaluate your financial situation and goals. Even if the lender’s new offer is not significantly better, it might still provide enough benefits to make staying worthwhile.
How Do I Compare Lenders?
If you choose to switch your mortgage to another bank, it’s crucial to compare lenders thoroughly. Using a combination of comparison websites and professional advice from mortgage brokers can help you find the best loan for your needs.
Using Comparison Websites
- Benefits: Comparison websites offer convenience by allowing you to quickly compare interest rates, fees, and features from multiple lenders in one place. They also provide a comprehensive view of the market, highlighting various loan options you might not have considered.
- Disadvantages: These websites are businesses and may earn commissions from lenders featured on their sites, which means their rankings and recommendations may be biased. In addition, comparison websites may have incomplete listings, as not all lenders participate in comparison websites – this means you might miss out on some potentially better offers.
- What to Watch Out For: Check for transparency – see how the website ranks lenders and whether they disclose any relationships with the lenders. In addition, ensure the information is accurate and up-to-date by cross-referencing with lenders’ official websites.
Consulting Mortgage Brokers
- Benefits: Benefits: As experts, mortgage brokers have in-depth knowledge of the market and can offer personalised advice on switching mortgages based on your financial situation. Brokers can also access a wide variety of loan options from different lenders, increasing your chances of finding the best deal.
- Disadvantages: While brokers are legally required to act in the client’s best interests, some of them may favour lenders who offer higher commissions – which might not always align with your best interests. In addition, some brokers work with a limited panel of lenders, so you might not get a full view of the market.
- How to Choose a Broker: Ensure your broker is accredited and has a good reputation. Moreover, ask how the brokers are compensated and whether they disclose all available options.
Key Features to Compare
- Interest Rates:
- Fixed vs. Variable Interest: Understand the differences between fixed rate and variable rate and choose one that suits your financial stability and goals.
- Comparison Rate: Look at the comparison rate, which includes both the interest rate and fees, to get a better idea of the true cost of the loan.
- Fees:
- Upfront Fees: Consider application fees, valuation fees, and any other initial charges.
- Ongoing Fees: Check for monthly or annual service fees that could increase the loan’s overall cost.
- Discharge Fees: Be aware of any fees for exiting your current loan early.
- Loan Terms:
- Loan Duration: Compare the loan terms offered by different lenders. While longer terms might mean lower monthly payments, they might also higher overall interest.
- Flexibility: Look for options that allow you to make extra repayments without penalties. Check for additional features as well, such as redraw facilities and offset accounts. Furthermore, check if the lender offers flexible repayment schedules so you can better manage your cash flow.
What Are the Steps to Switching Home Loans?
Once you’re done determining what you’re looking for in a new loan, researching and comparing your loan options, choosing your lender, and assessing the costs and fees involved, you can proceed to refinance your home loan. Here are the steps to transition from your current home loan to a new one that better suits your financial needs and goals:
Step 1. Check Eligibility Criteria and Loan Requirements
- Credit Score: Make sure you have a good credit score.
- Income and Employment: Confirm that your income and employment status meet the new lender’s requirements.
- LVR: Ensure your LVR is acceptable to the new lender. Typically, a lower LVR results in better loan terms.
Step 2. Prepare Necessary Documentation
- Identification: Provide proof of your identity, such as a driver’s licence or passport.
- Income Verification: Gather recent pay slips, tax returns, and employment details.
- Property Details: Include property valuation reports and details about your current home loan.
- Expenses and Assets: Prepare statements showing your current expenses and assets, including bank statements and records of other loans or debts.
Step 3. Apply for the New Home Loan
- Refinancing Application: Fill out the application form with the new lender and submit your documents, ensuring all information is accurate and complete.
- Follow-Up: Stay in regular contact with the lender to address any queries or additional documentation requests promptly.
Step 4. Complete the Settlement Process
- Approval: Once your application is approved, carefully review the entire loan offer.
- Settlement Coordination: Work with your new lender, current lender, and any involved legal professionals to coordinate the settlement date. This involves ensuring all necessary paperwork is in place and that both lenders are aligned on the settlement process.
- Transfer of Funds: Ensure the new lender pays off your existing loan and transfers the mortgage to the new loan.
Step 5. Notify the Previous Lender and Transfer the Mortgage
- Formal Notification: Inform your current lender about the switch and confirm the discharge of your existing mortgage.
- Redirection of Payments: Set up any direct debits or automatic payments to your new loan account to avoid missing repayments.
- Follow-Up: Ensure all documentation is processed correctly and your new loan is set up according to the agreed terms.
How Do I Manage My Loan Features Post-Switch?
Managing your loan features effectively after switching home loans can help you maximise the benefits of your new mortgage. Here are some key features to consider and how to manage them:
Splitting Loans: Combining Fixed and Variable Rates
- Split Loan: A split loan lets you divide your mortgage into two portions – one with a fixed interest rate and the other with a variable rate. This can offer the best of both worlds: the stability of fixed rates and the flexibility of variable rates.
- Benefits:
- Fixed Rate Portion: This provides certainty in repayments, protecting you from interest rate rises.
- Variable Rate Portion: This allows you to take advantage of potential rate drops and offers features like offset accounts and redraw facilities.
- Considerations:
- Proportion Allocation: Decide how much of your loan you want to be fixed and how much you want to remain variable based on your financial goals and risk tolerance.
- Periodical Review: Regularly review your split loan arrangement to ensure it meets your needs as market conditions and your financial situation change.
Loan Portability: Keeping Loan Terms When Moving Properties
- Loan Portability: This feature lets you transfer your existing loan terms to a new property without needing to refinance.
- Benefits:
- Cost Savings: Loan portability lets you avoid discharge and application fees associated with closing and opening new loans.
- Convenience: Loan portability simplifies the process of moving to a new house by keeping your existing loan terms.
- Considerations:
- Eligibility: Check with your lender if your loan is portable and what conditions apply.
- Timing: Coordinate the sale of your current property and the purchase of the new one to ensure a smooth transition.
Additional Features: Using Redraw Facilities, Offset Accounts, and Repayment Holidays
- Redraw Facility: A redraw facility allows you to withdraw any extra repayments you’ve made on your loan, providing flexibility in accessing additional funds when needed.
- Benefits: Helps manage cash flow by giving you access to funds without taking out a new loan.
- Considerations: Be aware of any fees or limits on the number of redraws allowed.
- Offset Account: An offset account is a banking account linked to your home loan where the balance offsets the amount owed on your loan, reducing the interest payable.
- Benefits: It can significantly reduce the interest you pay over the life of the loan, potentially saving you thousands.
- Considerations: Ensure the benefits outweigh any fees associated with maintaining the offset account.
- Repayment Holiday: A repayment holiday is a feature that lets you temporarily pause or reduce your mortgage repayments, often used during times of financial hardship or significant life events.
- Benefits: A repayment holiday provides financial relief during challenging times without the need to switch mortgages or take out additional loans.
- Considerations: Understand the terms and conditions, including how interest will be calculated during the repayment holiday and what the impact will be on your overall loan term.
Additional Tips
Below are a few additional tips to help ensure that your decision aligns with your financial goals and is beneficial in the long term:
Following ASIC’s Advice
- Doing Your Homework: The Australian Securities and Investments Commission (ASIC) advises borrowers to thoroughly research and compare loan options.
- Seeking Transparency: Ensure all terms and conditions are transparent and that you understand them fully before switching home loans.
Final Thoughts
Ultimately, whether you choose to switch your mortgage or stay with your current lender, being well-informed and proactive will help you achieve better financial outcomes and greater peace of mind.
Switching home loans can be made even easier with the help of a professional mortgage broker. At Q Financial, we can assist you in comparing home refinance loan rates and with the necessary paperwork involved in switching lenders. Click the button below to book an appointment.
