Switching banks – why should you bother?

With ANZ and Westpac Bank's decision to raise mortgage rates independently of the Reserve Bank, lifting standard variable rates by 6 and 10 basis points respectively, RateCity estimates that around 1 million variable home loan customers will be impacted before the end of the month.

For the average home loan size, of around $300,000, that's a mere $12 increase per monthly repayment over 25 years – or less than $3 per day (based on a rate of 7.36 percent). Given the time and costs associated with refinancing, what's the point in switching to another lender for less than cost of your daily coffee?

If you've got more than 20 percent equity in your home and you're paying above 7 percent as a variable rate you should shop around and be ready to switch if you get a better offer.

The numbers are compelling: let's say you were paying 7.36 percent variable rate on a $400,000 mortgage (repayable over 25 years). Your monthly repayments would be $2920. Your costs of switching to a new loan — let's be conservative — might be $1000. If you set a goal of wanting to be better off within 12 months, you'd need to achieve a rate reduction of 0.39 percent and therefore get a new rate of 6.97 percent on your new loan. Your monthly repayments would now be $2819 — a saving of $91 per month. So inside 12 months, you've saved $1092, and spent $1000, to be $92 better off in the first year alone.

In fact, a rate reduction of well over 0.5 percent is very achievable for most people in this situation. That reduction would save you around $128 per month, meaning you're ahead within eight months. And obviously if you can do even better than that — say shave a full 1 percent off your rate and save of $250 per month — you'll be ahead inside four months.

For the real savings, it's important to think big picture too. Refinancing to cash in on a full 1 percent rate reduction using the above example could potentially save you more than $76,100 over 25 years!  To determine how much you could save by switching to a lower rate home loan try using a home loan calculator, because the savings could be significant.  

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