Switching home loans may help you save thousands of dollars in interest over the life of your loan. It can also enable you to take advantage of features offered by other loans that your existing mortgage may not have.
It costs nothing to reassess your current position and then decide if the benefits of switching are worth doing.
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 features you want. Then, ask your lender for a key fact sheet on each of them to allow you to compare them against each other. Key fact sheets provide the information you need in a set format that will allow you to compare apples for apples. They also contain important information to help clarify the whole package offered, such as the total amount to be paid back over the life of the loan.
Compare Interest rates, Fees and Features
When you have narrowed down to a short list of potential loans, create a table to compare interest rates, fees, and the 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. Making decisions just based on interest rates, for example, can actually lead to a greater total amount to be repaid over the life of the loan if there are features that kick in later in it’s life span.
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. If you do take the new loan under these terms, your repayments will decrease and you may think you are better off. However, if the interest rate was still the same and you only pay the minimum in repayments, it will now take you 25 or 30 years more to pay off the loan amount and over time you will pay more interest on the original loan amount. You may consider increasing your repayments for the new loan so you can still pay it off in a reasonable amount of time.
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.
*This post originally appeared on ASIC Moneysmart. To read more, kindly see Switching Home Loans.