Is your home loan still right for you?
Running a few simple checks on your mortgage could potentially save you thousands of dollars over the life of your loan.
For many of us, paying off a mortgage is likely to be one of the biggest regular expenses in our budget. And it could stay that way for up to 30 years. But that shouldn’t mean you ‘set and forget’ your mortgage for the life of the loan.
Running a few simple checks will help you decide if your home loan is still right for you, or if you should be looking for a better deal. Here’s how to get started.
Find out all the home loan features
Getting your head around all the types of home loans available can be confusing. It’s even more so when each of them comes with a plethora of features, making a loan appealing (or unappealing) for different reasons.
Some (generally variable-rate loans) come with redraw, which can be a handy home loan feature if you’ve made extra repayments in the past and need to access that cash for an unexpected expense.
Others have an offset account, which is a bank account linked to your loan. Any cash in the account is offset daily against your home loan principal, essentially reducing the interest you pay.
These features can sound good in theory, but they may also attract additional fees. For instance, the redraw feature on some home loans may have associated fees and withdrawal limits. An offset account may have an annual fee that more basic home loans may not. It’s worthwhile checking which features you have bundled into your loan, and what they’re costing you.
Understand your home loan interest rate
What interest rate are you currently paying on your home loan? With the average value of a new home loan for first home buyers over $400,000i, it’s a big financial incentive to do a health check on your home loan.
Unfortunately, comparing mortgages is not as simple as looking at interest rates. While it’s easy to be lured into a new agreement by a rate that seems lower, like many things in life, appearances can be deceptive.
There are two rates to consider when you’re re-evaluating the interest payable on your loan: interest rates and comparison rates. The interest rate is the annual interest cost for borrowing money, but it doesn’t take into account any fees. The comparison rate incorporates the annual interest rate as well as most upfront and ongoing fees, providing a clearer picture of how much you’ll be up for.
If you’re looking at switching providers, it’s a good idea to use comparison rates as your guide across various offerings. However, the comparison rate is calculated based on a $150,000 principal and interest loan over a 25 year term, so it’s not necessarily an accurate rate for your circumstances.
Ask to reduce your home loan interest rate
If you find a lower interest rate on the market, you don’t automatically need to change. Instead, you could contact your current lender and tell them you’re thinking about switching. If you have a good credit rating and more than 20% equity in your homeii, you may be in a better position to negotiate.
If you’ve found a better deal and are still considering making a switch, be aware that the costs of refinancing may outweigh the savings made by switching.
Should you make the home loan switch?
To get a bigger-picture view of the options, home loan comparison calculators can compare different home loan rates and fees to see which option may work out cheaper over the life of your home loan.
If you do your homework (or get a mortgage broker to do it for you), it’s possible you’ll find a home loan option that offers a lower interest rate, lower fees, more flexible repayment options or better features than the one you have.
i ABS, 5601.0 Lending Indicators, July 2020 ii Moneysmart.gov.au, Switching Home Loans ©AWM Services Pty Ltd. First published November 2020