Switching your mortgage lender, especially if you choose a lower interest rate, can potentially save you significant interest. However, before making a decision, you need to carefully weigh the pros and cons to ensure the potential savings outweigh the costs of switching. Here are some helpful calculations and steps to help you assess whether you should switch.
Considerations before switching mortgages
1. Try to negotiate with your existing lender
If you're considering switching lenders, try to negotiate with your current lender first. Explain that you're considering switching to a different lender that offers a lower rate, and your current lender may be willing to lower your rate to keep you.
When you have at least 20% When you have a high home equity and a good credit score, you have a stronger negotiating position. Compare other loan options to ensure you make the best choice for yourself.
2. Ensure the loan term is appropriate
Many lenders may require you to refinance your loan over a 25 or 30 year term. This may cause you to pay off your loan over a longer period than your current loan term, increasing your total interest payments.
It is recommended that you negotiate with your new lender to choose a term similar to your current loan term to avoid losing the savings from the interest rate discount due to extending the repayment time.
3. Pay attention to loan insurance (LMI) fees
If you have less equity in your home than 20%You may need to pay Lenders' Money Insurance (LMI) when switching your loan. This extra cost may offset the savings from the lower interest rate.
It’s recommended that you ask your current lender if you can refund some of your LMI to reduce switching costs.
Compare loan switching costs
Before switching lenders, get at least two different loan quotes and do a thorough fee comparison. Here are some common fees:
- Break Fee for Fixed-Rate Loans: If your current loan is a fixed-rate loan, early termination may incur default fees.
- Discharge Fee: A fee you pay when you close an existing loan.
- Application FeeA one-off fee paid when you apply for a new loan, usually ranging from AUD 300 to AUD 600.
- Internal switching fee (Switching Fee): You may also pay this fee if you change loan types within the same lender.
- Stamp Duty: In some cases, you may be required to pay stamp duty on your refinancing. The exact amount should be confirmed by your lender.
hint: Ask your new lender if they are willing to waive the application fee to attract your business.
How to calculate savings
Once you have listed your potential loan options and the associated costs, you can use Mortgage Switching Calculator To calculate:
- What are your switching costs?
- Total savings after switching.
- How long does it take to recover the switching costs?
This will clearly show whether switching loans is worthwhile and provide you with support in your decision making.
Case Study: Simon and Tiana's Loan Switching Plan
Simon and Tiana's fixed-rate loan is about to expire, and the interest rate will increase. They decide to look at other lenders and find two loans with lower interest rates:
- Loan A: Application fee is AUD 600, but the interest rate is lower.
- Loan B: The application fee is AUD 300, but the interest rate is slightly higher.
Ultimately, they choose Loan A because, despite its higher application fee, the lower interest rate provides greater long-term savings. After switching loans, their monthly payments are reduced by 280 Australian dollars, saving over the entire loan period AUD 84,040More importantly, they only need 5 months The switching costs can be recovered.
Conclusion: Is it worth switching your mortgage?
Switching lenders can be an effective way to reduce the cost of your mortgage, but you need to consider all the associated fees and long-term implications.
- Negotiating with your existing lender may be the easier option.
- Compare different loan options carefully and make sure you calculate any hidden fees.
Using tools like the mortgage switching calculator provided by Moneysmart can give you an accurate picture of whether you can actually save and support your financial decisions.
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