How to switch mortgages and save

Dominique Grubisa
Dominique Grubisa

Published 12:50 am 12 Jan 2021

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Many Australians are stubborn when it comes to their mortgages. Once they find a home loan that they are comfortable with, they tend to stick with it for many years, often ignoring the arrival of new lenders, changes in rates, and new loan products.

Given the enormous sums of money that most of us payout over the life of our home loans, it makes sense to periodically give some thought to refinancing, either via your existing lender or one of their competitors. A lower interest rate or more favourable terms could yield significant dividends over the life of your loan, knocking off tens of thousands – or even hundreds of thousands – of dollars in repayments.

However, be sure to factor in mortgage break fees and other costs when deciding whether refinancing is right for you. Read on to learn how to switch mortgages and save.

How do you ask your lender for a better interest rate?

If your main objective is getting a lower interest rate, you may not need to switch loans at all. Often your existing bank will be open to the idea of lowering your rate if you ask and explain that you are considering refinancing. Be sure to prepare properly before making your approach. Do some research so that you know what else is in the market and how your loan stacks up. Also check to see if your lender is offering new customers a discounted rate or special features and if so, use that as a negotiating tool to get the same or better. 

How do I compare the home loans and interest rates offered by different lenders?

Before refinancing, you should always get a number of quotes in writing from different lenders that include their rates, fees and features. Comparison sites, such as RateCity, Canstar, Compare the Market and Finder, can help save you time as they provide information on a wide range of mortgages. However, bear in mind they don’t cover all lenders. If you want details from a particular lender you should go directly to their website or call them. You may also consider using a mortgage broker.

What are the typical costs for refinancing a home loan?

Refinancing can be expensive as you may have to pay fees, such as a discharge fee or a mortgage break cost if you have a fixed rate, for exiting your loan early. You may also need to pay costs associated with taking out a new loan, such as lenders mortgage insurance if your deposit is less than 20 per cent of the loan, a fee for valuing the property, and mortgage registration and conveyancing fees. However, if you’re refinancing to a lower rate, these costs may be recouped over time because your repayments will be lower.

Can you switch mortgages after the fixed period?

Once a fixed term finishes – and you haven’t yet paid off your entire loan – you will need to decide whether to refinance with either your existing lender or a new one. It may be easier to stay with the lender you know, but it’s important to do your research to see what else is on the market.

How to save money with more flexible loan terms

Modern loans tend to include features designed to help you pay off your financial commitment more quickly. The result can be thousands of dollars in saved payments. Some of these features include:

  • Repayment flexibility that allows for additional repayments to be made;
  • Offset facilities that reduce the amount of interest you pay;
  • The ability to pay fortnightly rather than monthly;
  • The ability to pay loan fees and charges up front so the amount you need to borrow is reduced;
  • A home loan package that offers discounted products and low fees.

How to take advantage of money-saving home loan features

One of the best ways to save money on your home loan is to pay the loan off more quickly by making extra repayments. This will reduce the amount of interest you pay and result in thousands of dollars in potential savings. A popular way to do this is to make your loan repayments on a fortnightly, rather than a monthly basis as there are 26 fortnights in a year, but only 12 months so you’ll be contributing an extra month’s work of payments each year.

How long should the term be on a new loan?

Most loans are taken out on 25 to 30-year terms. However, the longer the term, the more interest you will end up paying. Work out upfront how long your loan period needs to be. A shorter loan period means you are paying more each month and this may not suit you at the time. If your loan term is over a longer period, such as 35 to 40 years, make sure you can make additional repayments when you want for no penalty.

How does my equity influence re-financing?

Equity is the difference between the value of your home and the amount you owe on it and is important when seeking to refinance. This is because the more equity you have available, the more security you offer your lender, which may lead to you being offered a more attractive rate and special features. Generally, you should have at least 20 per cent equity in your home if you want to avoid having to pay lenders mortgage insurance.

Frequently Asked Questions

Is it worth switching mortgage lenders?

If you can find a lender willing to offer you a better deal, then it makes sense to consider refinancing. But you need to do your research, and in particular weigh up the savings you expect to make against the costs of refinancing, such as discharge and new application fees. Before you make any switch though, try and negotiate a better deal with your current lender.

Can you switch banks for your mortgage?

You can either seek to find a new loan with the bank that holds your current loan, or you can refinance with a different lender. Refinancing with your current lender may mean less paperwork – as switching between financial institutions can be an administrative hassle – and you may be rewarded for being a loyal customer with fee exemptions. However, if you can get a better deal from a different lender, it’s likely to be worth making the switch in the long run.

Can I re-mortgage to pay off a debt?

Re-mortgaging to consolidate one or more debts into a home loan is a strategy designed to make debt repayments more manageable. As the interest rate on home loans is generally much lower than that for personal loans or credit cards, you can pay off all your loans at the one lower rate. There are pitfalls, including the danger of turning short-term debt into long-term debt by spreading the repayments out over a longer time period. This means your overall interest payments could end up being higher.

Does refinancing hurt your credit rating?

When you refinance, a lender assesses your creditworthiness for the loan based on your financial history and current circumstances. If you apply to a number of lenders in a short time frame, this could affect your credit rating negatively as it indicates you may be desperate for a loan. To try and avoid this, it may be better to research a number of lenders first and then apply to the one that best matches your requirements.

Can I re-mortgage if I own my house outright?

Yes, you can. One reason you may want to do this is to pay for a large expense such as a renovation. Remortgaging a home you own outright will also likely give you access to a lower interest rate because the loan is secured against your property. This does mean, however, that you may lose the property if you can’t keep up with your repayments. As with all loan applications you will need to meet eligibility and affordability criteria.

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Lawyer, Asset Protection Specialist and Property Educator

Dominique Grubisa is a practicing lawyer with over 25 years experience. She is a property investor and developer, an entrepreneur with businesses in Australia and Southeast Asia, a speaker, educator, writer and published author.

This column has been written for general information purposes only. It is not intended as legal, financial or investment advice and should not be construed or relied on as such.

About DG Institute

Founded in 2009, DG Institute strives to empower everyday Australians to grow and protect their wealth. Our goal is to provide direction, motivation and inspiration to our clients and help them perform at their very best. We do that through our professional services, in addition to teaching them how to grow their wealth through property and business education.

This column has been written for general information purposes only. It is not intended as legal, financial or investment advice and should not be construed or relied on as such.

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