Switching your home loan could save you thousands, just make sure you consider all of the costs and features and use ASIC’s new mortgage switching calculator to decide whether switching is worth it.
If you have a home loan you might be feeling the pinch of rising interest rates. Advertisements for home loans with lower interest rates may be tempting you to make the switch.
You will normally be charged a fee for breaking your current home loan and a fee to apply for the new home loan. You need to work out whether you will recover these costs by paying less in interest with the new loan. You can do this by using ASIC’s mortgage switching calculator.
ASIC’s mortgage switching calculator shows borrowers:
- How long before a cheaper loan will be an overall saving after switching costs;
- Which loan will be paid off faster; and
- How much can be saved in minimum monthly repayments.
Remember that comparing the cost of your home loan is only one part of the decision to switch. You should also compare the features.
If you are thinking about switching follow these four steps:
Step 1: Shop around
Find information about different loans on comparison sites such as www.RateCity.com.au or call a few lenders and ask them for details of their best rates.
Draw up a table with the interest rates, fees and features of your current loan and compare this with a few other home loans.
Talk to your current lender and tell them you are planning to switch to a cheaper loan offered by another lender. They may offer to reduce the interest rate or suggest a cheaper ‘no-frills’ loan. This could save you significant switching costs.
Consider taking the best deal to a mortgage broker, to see if they can do better.
Step 2: Work out the potential savings from switching
Work out what fees you will be charged if you change loans. Use the Mortgage switching calculator.
Brad and Jan have a $250k home loan with 20 years remaining and are considering switching to a loan with a 0.3% lower interest rate. Their exit and entry fees total $700. The calculator shows it will take Brad and Jan 12 months to recover the cost of switching. They could save $40 per month in repayments or pay off the loan 10 months earlier.
The calculator is available at www.fido.gov.au
You will need to decide whether the lower interest rate with a new loan outweighs the costs of switching from your existing one. The lower the exit and start-up fees, the more you stand to gain by switching. If the fees are high, you may be better off staying with your existing loan.
Step 3: Compare features
Look again at your list of potential loans. Compare the features such as:
- ability to make extra repayments
- offset account
- redraw facility
You may pay more for a loan with extra features and flexibility. Will these features be important to you?
Step 4: Decide and take action
Weigh up the potential cost savings and differences in features between loans.
You will only get the potential savings if the new loan stays cheaper over the long term. The longer it takes for a switch to save you money, the greater the chance that the interest rate savings may fade.
If you decide you would be better off switching, take action!
You can either use the savings to pay off your mortgage quicker, or make lower monthly repayments.
For more information on home loans and to use the mortgage switching calculator visit ASIC’s consumer website, FIDO at www.fido.gov.au or call 1300 300 630.
Tony D’Aloisio BA LLB (Hons)
Australian Securities and Investments Commission