Refinancing your home loan is a significant decision, and one that’s worth giving some proper consideration before taking the plunge. By following RateCity’s six-step process, you can accurately assess the current state of your personal finances, where you would like them to be, and determine whether switching from one lender to another will ultimately be worth it.
While you’re in the process of comparing the interest rates and financial services offered by other lenders, it’s often worth also looking at what your current lender is offering, and considering what else they could provide in the future. Could you ultimately be better off by sticking with your current lender rather than jumping ship? When is it a better idea NOT to switch your home loan?
Can you reach your refinancing goal with your current lender?
The needs of borrowers change over time. A first home buyer may enter into a mortgage with the goal of keeping their costs down and building up their equity, but after a few years they’ll be ready to put this equity to work, whether to finance a renovation to their existing property, or to upgrade to a new home that can more easily house their growing family. This could mean that a refinance may be on the cards.
If your circumstances change and your existing home loan no longer fits your financial requirements, it may be worth getting in touch with your existing lender to see if they can make the changes that would would be required to let them keep your business, whether that’s lowering your interest rate to make your mortgage more affordable, or adding extra features and benefits to your loan to provide greater value for your money. Many lenders will be willing to make certain concessions to their standard home loans and policies if it means you will remain a loyal customer.
Are the switching costs too much?
Depending on the lenders involved, switching home loans can be an expensive process. Some lenders who offer low interest rates charge high fees on their mortgages to compensate, including up-front establishment fees, and there are also other costs such as stamp duty to consider.
Refinancing home loans with no upfront fees:
If your current home loan has an interest rate that’s been fixed for a set period of time, breaking away from the loan during this period could incur some significant break fees, which can make switching loans a less attractive prospect.
And if you haven’t had your existing loan for long enough to build up a substantial amount of equity, you may not have enough available to serve as a deposit to secure a new loan when refinancing. This would mean that you’d have to pay Lender’s Mortgage Insurance, which can prove quite expensive.
So even if a new home loan looks much more affordable than your existing one in terms of its monthly repayments, if making the switch will cost you more than you can realistically afford at present, or if it will take too long for you to break even and start saving money on your loan, renegotiating the terms of your existing home loan with your current lender could prove to be a more attractive option.
How to negotiate a better rate
Your first step should be to gather up the details of home loan offers from other lenders to compare against your existing deal. This can show your lender that you’re serious about switching home loans, and help encourage them to make a suitable counter-offer.
Many lenders offer low interest rates on new home loans in order to attract new customers. If your current lender is currently offering cheaper or more attractive home loan deals, it can be worth bringing these rates to the negotiating table to see if your continuing business is just as valued as that of a new customer. Just keep in mind that some discounted “Honeymoon Rates” offered to new home loan customers are strictly temporary only, and don’t reflect the lender’s ongoing interest rates.
Lenders tend to offer their most attractive home loan interest rates to customers that represent the safest financial risks – borrowers with steady incomes, full deposits, and spotless credit histories. If your income isn’t consistent, your equity is limited, or your credit history is less than ideal, then you’re less likely to qualify for one of these low-interest mortgages. Comparing your current loan to a loan that you’re unlikely to qualify for could risk undermining your negotiation.
While simply paying less in interest to save money and get a better deal is a worthy financial goal in itself, you may have better luck in your negotiation if you can provide your lender with a reason for wanting to refinance, such as unlocking your equity to afford renovations, or consolidating your other debts into your mortgage. This can help to give your lender a better idea of which loan options will offer you the greatest value, and streamline the negotiation process.
You may be in a situation where you can afford the repayments on your existing mortgage comfortably enough, but you don’t feel that you’re really getting enough bang for your home loan buck. Rather than negotiating down the interest rate, find out if your lender would be willing to bundle value-adding extras into your existing home loan package, such as access to other financial services, or convenient features such as offset accounts and redraw facilities.
When you get in touch with your lender to negotiate a new interest rate, your success could partially depend on who you speak to. For example, the branch manager at your local bank may not have the authority to make drastic changes to your home loan’s terms, at least not without contacting head office first.
If you call your lender and tell them you’re hoping to refinance your home loan, you should be transferred to a customer retention specialist, whose job description is based around keeping customers like yourself happy with the lender’s services. These specialists are more likely to be able to provide incentives to encourage you to stay with the lender, such as making your home loan more affordable or offering greater value for your money.
Sometimes a lender simply can’t match what the competition is offering. For example, a large bank may not be capable of providing interest rates as low as some online-only non-bank lenders, as their operating expenses and costs for maintaining their branches are simply too high. When using other loans as examples when negotiating, it’s usually best to compare apples with apples, or at least lenders with similar lenders.