The homework you need to do before switching your home loan
Changing your home loan can lead to monetary savings and you can also benefit through various features that are not a part of your existing loan. However, switching loans comes with its share of fees, so you should weigh the pros and cons before making the switch.
What is ‘switching home loans’?
Your financial situation changes all the time and sometimes existing home loans can seem like burdens. The good thing is that people with home loans have the option to change their existing loans to new ones, which can come with lower repayments as well as other useful features. Generally, people may want to switch their home loans for the following reasons:
- Looking for better interest rates
- Looking for a longer term and lower repayments
- Looking for additional funds
- Looking for increased or decreased flexibility which can include easy access to funds as well as wanting to do away with access to funds
- Having to deal with financial instability
Once you’ve decided that you want to go forward with the switch, you have to narrow your options down to a suitable home loan offered by either your existing lender or a different lender. You need to get in touch with your existing lender to inform them of your desire to switch and at this point your lender may offer you a better deal. If you do decide to move forward with the switch, what basically happens is that you apply for a new loan and use proceeds from the same to pay off your existing loan completely.
For example, if you owe $75,000 on your existing home loan, you can get a new loan for the same amount and this money goes towards paying your existing loan. To qualify for the new home loan, the application process remains pretty much the same as when you originally applied for a loan.
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Before switching loans or lenders
Before making a switch, review your existing loan for fees, charges and restrictions, because your loan may feature a range of conditions when switching loans. To establish if you need to switch just your loan or your lender as well, consider the following:
- Have you spoken to your existing lender and told them your plan? Many times, your existing lender will counter-offer you a discounted interest rate or the ability to switch to a more suitable loan for you, saving your the hassle and money associated with going to a new lender.
- Home loan features. Most home loans have various features attached to them and this is something that needs your consideration when looking for a new home loan. Some useful features include additional repayment options, offset accounts, redraws and repayment holidays.
- Costs incurred when switching to a new lender. When changing lenders you may have to incur break costs or other fees and the loan's approval date has a bearing on this. This is because variable rate loans approved after July 1, 2011 are not subject to exit fees. If your loan approval took place prior to this date it is best to check with your lender to see what fees apply. Fixed rate loans, approval date notwithstanding, attract break costs during switches. Some lenders charge discharge fees to make necessary preparations for the transfer.
- Costs incurred when switching between variable and fixed rate loans. Switching between these two types of loans impacts on the costs you have to bear. This is because switching from a fixed rate loan to a variable rate loan generally attracts break costs, due simply to your lender's estimated losses because of the switch. Switching from a variable rate loan to a fixed rate loan does not attract break costs, although you still need to find out about any exit fees or early payment charges.
- Loan term and repayments. The loan term requires your attention for the simple reason that while longer loan terms can translate into lower monthly repayments, you may have to pay more in the form of interest. On the other hand, a reduced term results in higher repayments, which is why affordability comes into play.
- What are packaged loans? Some lenders offer loans in the form of packages which, in addition to conventional home loans, can include elements like transaction accounts, credit cards, insurance covers and reduced overall fees.
Pros and cons of switching home loans
Switching a home loan comes with its share of pros and cons, so knowledge about both can help.
- Reduced interest rate. In most cases, people looking at switching their home loans do so in search of lower interest rates and home loans with lower interest rates can help you save hundreds and even thousands of dollars.
- Availability of funds. Switching your home loan can give you access to your home’s equity, allowing you to make further investments or large purchases.
- Added features. If your home loan does not come with any added features, you can look for a new one that comes with redraw ability, multiple repayment ability, an offset account or even a credit card.
- Penalties. When making a switch you have to know in advance just how much you have to pay in the form of penalties. This is because what you end up paying in the form of penalties can make a seemingly good deal turn bad in no time.
- Fees. You will usually have to pay the upfront fees associated with your new home loan if you switch lenders. This includes the application fee, valuation fee, plus any ongoing fees.
Things to avoid when it comes to switching home loans
If you have to pay more than you would save when getting a new loan, then it may not make financial sense to not go forward with the switch. What you also have to bear in mind is that your new lender can raise interest rates in the future. After all, there are lenders that lure customers with low interest home loans at the start and then increase interest rates later, which is why you should stick to reputable lenders.
Since switching a home loan requires that you apply for a new home loan, you should ideally avoid making big purchases before you apply for the loan and you should not change your job in the period just before you apply. Not paying attention to the new loan’s rates and fees can lead to surprises later on.