Switching Home Loans
Switching home loans can help you save thousands of dollars in interest. It can also enable you to take advantage of the features offered by another loan. Dwell on important considerations and decide if the benefits of switching are worth the cost.
Shop around
Determine what loans are being offered by different credit providers. You can use a comparison website or you may opt to consult with a mortgage broker to help you choose a loan.
Ask for a Key Facts Sheet from your Lender
Find some loans that offer the feature you want. Then, ask your lender for a key fact sheet on each of these loans to compare each loan’s features. Key fact sheets provide the information you need in a set format. Hence, it will be easier for you to shop around and compare loans. Key fact sheets also feature important figures, such as the total amount to be paid back over the life of the loan.
Ask your current broker to do better
Ask a mortgage broker to review the market for you. Always remember that a discount lower than the listed interest rate will often be available. Hence, you should speak to broker to ensure that credit providers give you the best deal.
Compare Interest rates, Fees and Features
When you have a short list of potential loans, create a table to compare the interest rates, fees, and repayment amount of each loan. It is important for you to check the loan features to ensure that you will be getting the feature you want and not paying for the ones that you don’t require.
Calculate the costs of switching
Exit fees, Break fees, and Start-up fees
Credit providers are not allowed to charge exit fees on loans taken out after 30 June 2011. If you took out a home loan before 1 July 2011, determine if your lender charges exit fees on your loan.
If your loan is under a fixed rate, you may be required to pay a break fee. Start-up fees on a new loan is also to be considered.
Lender’s Mortgage Insurance (LMI)
Lender’s mortgage insurance (LMI) is a type of insurance that lenders take out to protect themselves from borrowers not being able to repay the loan. If you paid LMI on your current loan, you should determine if you have enough equity in your home loan to avoid paying LMI again.
Term of the New Loan
Some credit providers permit you to refinance with a loan of 25 or 30 years rather than the number of years you have left to pay off your current loan. Hence, if you take on the new loan, your repayments will decrease. However, if you only pay the minimum in repayments, it will take you 25 or 30 years more to pay off the loan and over time you will pay more interest on the loan.
Consider increasing your repayments for the new loan so you can still pay it off in a reasonable amount of time. You don’t want to still be paying off your home in your retirement just because you switched your home loan.
Consider other options
There are other ways to decrease your home loan debt aside from switching loans:
- Make additional repayments – this will save you interest and help you pay off your loan quicker
- Make more frequent repayments – pay loans back weekly or fortnightly at a slightly higher rate (e.g. 5-10% more) rather than just making the standard monthly repayment
- Consolidate multiple loans – by paying of one set of fees, you will save money and may be able to get a better interest rate
Switching home loans can save you money, but always determine if the benefits, such as interest rates savings, are worth the fees you’ll be charged for leaving one loan and taking up another.
Determining whether or not to switch home loans is a crucial decision to make. Best Interest Brokers can help you analyse your options when it comes to reducing your home loan repayments.
Talk to us and we will be happy to assist you!
*This post originally appeared on ASIC Moneysmart. To read more, kindly see Switching Home Loans.