Tips on how to switch home loans for borrowers looking for a better deal

Senior News Journalist · 20 November 2020
With record low interest rates available, some borrowers may be able to save thousands of dollars by switching home loans for a better rate at their current lender or by changing banks altogether. Here’s how to do it.
Woman budgeting to switch home loans
Have you considered if a lower home loan rate could help free up space in your budget? Image source: Andrey_Popov, Shutterstock.

Home loan rates have hit record lows after the Reserve Bank of Australia (RBA) slashed the cash rate to a new low of 0.10% in November.

Lenders have been prompted to reduce the rates they charge on mortgages, and are now fiercely competing for new business. Some Australian banks are offering fixed and variable rates starting with a ‘1’, Canstar’s database shows.

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.

In fact, the most recent Australian Bureau of Statistics (ABS) figures on home loans showed the value of external refinancing (when people switch their home loan to a different lender) was up nearly 18% in September from the month prior and around 33% from the same time last year, with mortgage holders having refinanced around $13 billion worth of owner-occupier and investment loans. Owner-occupier loans where people switched lenders reached 17,747 in September alone, while customers negotiated a better rate with their existing lender on 11,539 loans throughout the month.


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. If you haven’t looked at your options recently, you may find that compared to your current home loan, at least one of them offers:

  • a lower interest rate
  • lower fees
  • more flexible repayment options
  • better features

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. It could also be good to keep in mind that many lenders have adjusted their lending criteria in the wake of the COVID-19 pandemic.

Also, several lenders including the big four banks have reduced fixed rates recently, but only for new customers. It is possible, in some situations, to break free from an existing fixed loan agreement, but some lenders may charge what is known as a ‘break cost’ or ‘break fee’ if an existing borrower wishes to end their fixed-term loan before the end of the contract to switch to a different rate or bank.

Of course, you don’t have to immediately switch to a different provider when looking for a better deal – you could first try negotiating for a lower rate with your current lender. Below are some tips on how to go about that, shared by Canstar.

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 example, several owner-occupier, principal and interest home loans on our database have dipped below 2%, while others are above 7% (as of 19 November, 2020, for variable and fixed-rate $400,000 loans at 80% loan-to-value ratio (LVR), excluding honeymoon, intro-rate and first home buyer only home loans).

Refinancing to a lower rate could potentially save a home owner thousands a year. For instance, take the hypothetical example of an owner-occupier who was paying principal and interest with 80% LVR on a $400,000 home loan that had the average interest rate on Canstar’s database of 3.42%. If that home owner was able to refinance to a loan at, say, 1.99% (comparison rate 2.47%), it would, over the life of a 30-year loan, provide more than $300 in savings each month on mortgage repayments (assuming rates remained the same).

It could be worth checking out your options and trying to negotiate with your existing lender for a better rate. 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:

1. Compare interest rates

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. Some lenders are currently offering record-low rates for borrowers with deposits as high as 40% of the property’s value. You might also want to check your credit score, which lenders may use to help determine your creditworthiness and ability to refinance.

2. Check what’s on offer at your bank

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.

3. Consider switching to a new lender

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.

4. Check for fees and extra costs

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 lenders 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.

5. 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.

6. 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, for example, 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.

This story has been updated.

This article was reviewed by our Sub Editor Tom Letts before it was published as part of our fact-checking process.

Follow Canstar on Facebook and Twitter for regular financial updates.

Thanks for visiting Canstar, Australia’s biggest financial comparison site*

→ Looking to find a better deal? Compare car insurance, car loans, health insurance, credit cards, life insurance and home loans with Canstar. You can also check your credit score for free.

Similar Topics:

Share this article