A number of home loan lenders have dropped their interest rates since the Reserve Bank of Australia (RBA) cut the cash rate in June, and then again in July and October in 2019. In fact, Canstar’s home loan database showed there were more than 860 mortgage rate cuts for owner-occupiers since the cash rate dropped on 4 June, 2019*.
Savvy customers have been watching mortgage rates drop, and have used this opportunity to get a better rate from their current lender, while many others aren’t afraid to say goodbye to their current lender in favour of securing a lower rate.
If you’re thinking about looking around for a better deal, here are some points to consider.
Why doing your homework can pay off
Switching or refinancing your current home loan part-way through the loan term to another loan that better suits your needs could potentially save you money. There are thousands of home loans available on the market, so if you haven’t compared your options recently, you may find at least one of them offers a lower interest rate, lower fees, more flexible repayment options or better features than your current home loan.
Since the RBA cut the official cash rate in June, July and October, 2019, after almost three years of remaining steady, home loan lenders have been cutting their interest rates in line with the downward trend of the cash rate. Our database shows there are now loan rates starting with a “2” available for the first time on record.
Should I switch home loans?
If you can find home loans offering better value than your current mortgage and you’re not satisfied after negotiating with your current lender, you could consider refinancing. After all, why should you be paying more for the same sort of product you could find elsewhere?
Although there may be some refinancing costs to bear in mind – such as discharge and application fees – the savings earned by switching could outweigh those costs with the right loan choice for you. It’s generally worth weighing up the costs to refinance against the savings you expect to make before making any concrete moves.
Of course, you don’t have to immediately switch to a different provider – you could first try negotiating for a lower rate with your current lender. Here are some tips on how to go about that:
How much could I save by switching home loans?
There are more than 100 home loan lenders on Canstar’s database, and the difference in interest rates on offer can be significant.
For instance, the highest standard variable rate on the database for owner-occupiers paying principal and interest with an 80% loan-to-value ratio (LVR) on a $400,000 home loan is currently 7.07% (comparison rate 7.33%), while the lowest is 2.69% (comparison rate 2.71%). Over the life of a 30-year loan, the lower rate could work out to provide more than $1,000 in savings each month on mortgage repayments compared to the higher one.
Given there are currently more than 340 owner-occupier home loans on Canstar’s database, both variable and fixed, available with interest rates below 3%, it could be worth checking out your options and trying to negotiate with your existing lender**. But if they won’t give you a discount, it might be time to vote with your wallet.
How to switch home loans
If you’ve decided it could be worthwhile to consider switching from your current home loan lender, here are some tips:
- Firstly, know what’s on offer. Jump online and compare the rates available from various institutions. If you have at least 20% equity in your home, you may be in a position to get even more competitive rates. You might also want to check your credit score, which lenders may use to help determine your creditworthiness and ability to refinance.
- Phone your existing institution and ask them what discount they can offer you. If you know what you can get elsewhere, you’re in a position of power. You might find some sharp negotiation with your existing provider saves you the effort of moving.
- If your existing provider won’t play ball, it could be time to consider switching your mortgage to a new provider. While changing your bank may seem daunting, it doesn’t have to be a difficult process – your new lender should be able to do most of the legwork for you.
- Check whether there will be any start-up fees, break fees or other costs involved, and factor them in before you switch. If you have less than 20% equity, you might also be up for Lender’s Mortgage Insurance, which could make the cost of switching significantly less affordable. Your new potential lender will generally be able to tell you if any mortgage insurance will apply.
- Calculate your break-even point. While a lower interest rate might mean you could save money on monthly repayments, the costs to refinance could actually mean it may take a while for any real savings to flow through. One way to calculate when this will be is to add up the costs of refinancing and divide that by the monthly savings you would make on repayments. As a hypothetical example, if it costs you $1,000 to switch to a new lender, but you expect to save $50 per month in repayments, it would take 20 months to break even. Remember, even if you refinance to a lower rate it could be worthwhile keeping your repayment amounts the same anyway to save more money in interest over the life of your loan.
- Check the length of your new loan. The typical home loan term in Australia is 25 to 30 years, and some lenders will only let you take out a loan of this length, rather than one which is as long as your previous mortgage had remaining. You might end up with a 25-year term rather than the 17 years you had remaining, which may result in you paying more in interest than you otherwise would, so it can be important to double-check this with your new lender.
These are some of the main things you need to be aware of – your new lender will generally be able to take care of the actual process of switching your loan over, transferring any automatic payments and so forth.
If the move represents a saving of a few hundred dollars a month, it could be time well-spent.
Additional reporting by Justine Davies.
Image source: kunakorn kuis karkai (Shutterstock)
*As at 18 December, 2019. Based on owner-occupier standalone and package loans available for $400,000, 80% LVR and principal and interest repayments. Includes new to bank interest rates and specials, but excludes honeymoon, intro-rate and first home buyer-only home loans.
**As at 19 December, 2019. Based on variable and fixed loans that include standard variable products available for loan amounts at all LVRs with rates under 3%, and fixed rate home loan products available for all fixed terms, loan amounts and LVRs with rates under 3%.