Switching home loans: how & why?
More Australians are switching their home loan to a different lender. This surge in what’s known as refinancing is largely due to borrowers seeking to take advantage of lower interest rates to save money. In short, some lenders have been shy of passing on interest rate reductions in full to their current customers, so borrowers are jumping ship and moving their home loan to lenders offering lower interest rates. Could switching home loans be a good tactic for you?
Borrowers refinance their home loans for a number of reasons. While some may simply be unhappy with their current lender or want a home loan with different features, many borrowers also refinance in order to access the equity in their homes or investment properties in order to:
- Put money towards a deposit on an investment property
- Help their child with the deposit for their first home
- Consolidate their debts
- Pay for private school fees or higher education for their children
- Pay for a major expense, such as an overseas holiday
What to consider before you switch
Before you approach other lenders to refinance your home loan, some number crunching is necessary. Firstly, get out your original home loan documents or ask your current lender for a key facts sheet relating to your loan so you know exactly where you stand. Check for any costs involved in closing your current loan such as exit fees (only applicable on loans taken out before July 2011) or break costs if you have a fixed rate loan.
Next, look into any costs that could apply when you switch to a new lender. These might include:
- Fees for a valuation of your home or investment properties
- Establishment or application fees
- Loan approval fees
- Lenders’ Mortgage Insurance (LMI)
- Settlement and handling fees
- Mortgage stamp duty
- Mortgage registration
- Legal fees
- Ongoing account fees
Weighing up the pros and cons
You need to be sure the savings you gain over time with a lower interest rate will outweigh the above costs. An experienced mortgage broker can help you with the task of comparing home loans and lenders and weighing up the pros and cons. Your mortgage broker may also be aware of any discounts below the listed interest rate that could be available from some lenders.
You may find that your new lender will only offer you a loan over 25 to 30 years, rather than the same number of years you have left to pay off your current loan. In this case, your repayments will be lower. This may be to your advantage for a short while, however it’s worth thinking about increasing the repayments on the new loan to match the amount you are currently paying in order to pay off your home sooner.
If you don’t currently have home loan insurance in place, then it’s worth considering taking it out to cover the repayments on your new loan in the event of serious illness or injury, involuntary unemployment or death. Covering yourself with an ALI Group Loan Protection Plan is easy, may give you peace of mind and, unlike similar insurance plans, remains in place if you change lenders. Ask your mortgage broker for more information or contact ALI Group on 1800 006 776 today.
Loan Protection Plan is jointly issued by Hannover Life Re of Australasia Ltd ABN 37 062 395 484 (Death, Terminal Illness, Living and Accidental Injury Benefits) and QBE Insurance (Australia) Limited ABN 78 003 191 035 AFSL 239545 (Involuntary Unemployment Benefit). It is distributed by Australian Life Insurance Distribution Pty Ltd ABN 31 103 157 811 AFSG 226403 (ALI). ALI receives commission for each policy sold. Any advice provided is of a general nature only and does not take into consideration your personal objectives, financial situation or needs. You should consider the Product Disclosure Statement when deciding if this product is appropriate for you.