Should You Switch Your Home Loan?

If you’ve been a mortgage holder for a few years, you may be looking for a better deal on your home loan. To get a more attractive interest rate or more favourable terms and conditions, this could mean you need to switch home loans.

What does it mean to switch home loans?

Switching home loans means swapping your current mortgage for a new, hopefully better one. A home loan switch could mean refinancing with your current lender or getting a different mortgage with a new lender.

Common reasons to switch your home loan

There are plenty of reasons you may want to switch your mortgage.

To own your home sooner. Paying off a home loan as quickly and cheaply as possible should be the goal of every mortgage holder, as it means owning a valuable asset outright. Switching to a new loan — such as one boasting an improved interest rate and better terms and conditions regarding monthly or annual fees — could help set you on the path to financial freedom sooner.

To avoid a variable rate. Alternatively, you may be about to come off a fixed-rate loan after the first few years of your mortgage. Doing so could entail moving to a variable interest rate higher than the market average. In this case, seeking a better deal elsewhere makes good sense.

To minimise mortgage stress. Another reason for switching may be that you are struggling to keep up with your current home loan. In that case, you might want to reduce your monthly repayments by lengthening your current mortgage term. Or, you could come to another financial arrangement involving switching mortgages with your current lender.

To change your conditions. Another reason is that you want a different type of home loan, such as switching from an owner-occupier home loan to an investment loan. For example, say you have been posted interstate or overseas for work and no longer live on the property. In that case, you could amend your mortgage to start earning rental income.

Pros and cons of switching home loans

Switching home loans should save you money when done properly. However, before you switch, make sure the potential benefits outweigh the possible risks.

Pros

Greater loan flexibility. One of the main reasons for switching home loans is to get one tailored exclusively to your needs, which may change along with your circumstances. Switching loans may shorten the loan term or let you pay it off faster or slower, which might better suit your new financial situation.
Lower interest rate. The most obvious reason to switch mortgages is to get a better interest rate, which means paying off less money and owning the property outright sooner. Make sure there aren’t hidden catches when applying to switch loans. If possible, get an expert, such as a mortgage broker, to review any fine print in the documents.
Better terms and conditions. Likewise, fewer monthly or annual fees means more money to put toward paying off the principal — or just to save for other things. These small changes can add up throughout a 20- to 30-year mortgage.
Cash incentives. Many lenders offer cash incentives for mortgage holders to jump ship. Just be aware that a few extra hundred bucks now only equates to very little in your mortgage journey.

Cons

Fees and charges. Switching loans comes with a range of hidden costs. If, for example, you’re on a fixed-rate loan and want to break it to move to another mortgage, you may need to pay a break fee. Then, there are discharge or termination fees when you close your current mortgage, an application fee for a new one, a switching fee for refinancing internally, and possibly stamp duty when you take out a new mortgage. A new lender may be able to waive some or all of these if they’re serious about attracting your business. However, you should be wary of lenders waiving fees for higher interest rates — most of these are relatively small one-off charges, whereas a higher interest rate will affect your repayments for years.
Longer loan term. Some lenders want to hook you in for as long as possible, and longer mortgage terms mean more interest repayments over the years. Some will only refinance with a new 25- or 30-year loan, so make sure you factor this in when applying and negotiate the term accordingly. Remember, if you’ve already paid off five years or more of your mortgage, you don’t want to return to square one.
You may be liable for insurance. If you have less than 20% equity in your property, you may want to wait to switch until you build more equity. Otherwise, you could be liable for lenders mortgage insurance. Check where you stand first and get a property valuation if necessary.
Credit rating may be affected. Switching home loans could negatively affect your credit rating. Still, that impact shouldn’t be too profound if you have a solid history of making timely repayments to your mortgage and other loans.

How to switch home loans

Switching home loans should not be an arduous task, especially if you have the support of a financial planner or property expert throughout the process. A mortgage broker, for example, should be on top of the average interest rate, how your mortgage compares, and where to find a better deal.

Shop around

Start by shopping around to weigh your options, comparing what the lender offers with what you and your broker have found elsewhere. At a minimum, get at least two mortgage quotes tailored to your current situation. Having at least 20% equity in your property and a good credit rating will put you in a good bargaining position.

Compare offers

Then, double-check quotes and offers with a mortgage switching calculator to ensure you would actually come ahead with a new loan. The calculator should also show you how long it will take to recover the switching cost, accounting for all associated charges.

Have a chat with your current lender

It’s always a good idea to talk to your current lender first to see if they can match a deal you’ve found elsewhere. If you’re only five years into a 25-year mortgage, they will likely want to keep you on their books, paying interest for the next 20 years.

Once you tell your lender you are planning to switch — either because of the interest rate or cheaper annual fees — they may just be willing to tweak your current mortgage accordingly to keep your business. For example, they may offer to pay out the current mortgage and switch you to a new one, possibly with a different term and including conditions you have agreed upon.

Lodge your application

If, on the other hand, you don’t get any joy from your current lender, you can initiate the application process with a new one. They will assess your eligibility as they would with any new customer, so make sure your finances and credit rating are in order.

Switching home loans can take four to six weeks — a short time in the grand scheme, considering a mortgage can last up to 30 years, So, taking a few more weeks to sort through offers before applying and then waiting for approval should not influence your decision. The patience you spend now should pay off in the long run.