Should you switch or negotiate a better rate?

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

Get the facts on the competition

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.

Get the facts on your current lender’s new home loans

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.

Make sure you qualify

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.

Be clear about your goals

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.

Find out if you can get more value for your money

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.

Make sure you talk to the right people

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.

Be realistic

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.

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Learn more about home loans

How do I refinance my home loan?

Refinancing your home loan can involve a bit of paperwork but if you are moving on to a lower rate, it can save you thousands of dollars in the long-run. The first step is finding another loan on the market that you think will save you money over time or offer features that your current loan does not have. Once you have selected a couple of loans you are interested in, compare them with your current loan to see if you will save money in the long term on interest rates and fees. Remember to factor in any break fees and set up fees when assessing the cost of switching.

Once you have decided on a new loan it is simply a matter of contacting your existing and future lender to get the new loan set up. Beware that some lenders will revert your loan back to a 25 or 30 year term when you refinance which may mean initial lower repayments but may cost you more in the long run.

Can I change jobs while I am applying for a home loan?

Whether you’re a new borrower or you’re refinancing your home loan, many lenders require you to be in a permanent job with the same employer for at least 6 months before applying for a home loan. Different lenders have different requirements. 

If your work situation changes for any reason while you’re applying for a mortgage, this could reduce your chances of successfully completing the process. Contacting the lender as soon as you know your employment situation is changing may allow you to work something out. 

Who has the best home loan?

Determining who has the ‘best’ home loan really does depend on your own personal circumstances and requirements. It may be tempting to judge a loan merely on the interest rate but there can be added value in the extras on offer, such as offset and redraw facilities, that aren’t available with all low rate loans.

To determine which loan is the best for you, think about whether you would prefer the consistency of a fixed loan or the flexibility and potential benefits of a variable loan. Then determine which features will be necessary throughout the life of your loan. Thirdly, consider how much you are willing to pay in fees for the loan you want. Once you find the perfect combination of these three elements you are on your way to determining the best loan for you. 

Can I refinance if I have other products bundled with my home loan?

If your home loan was part of a package deal that included access to credit cards, transaction accounts or term deposits from the same lender, switching all of these over to a new lender can seem daunting. However, some lenders offer to manage part of this process for you as an incentive to refinance with them – contact your lender to learn more about what they offer.

How can I get a home loan with bad credit?

If you want to get a home loan with bad credit, you need to convince a lender that your problems are behind you and that you will, indeed, be able to repay a mortgage.

One step you might want to take is to visit a mortgage broker who specialises in bad credit home loans (also known as ‘non-conforming home loans’ or ‘sub-prime home loans’). An experienced broker will know which lenders to approach, and how to plead your case with each of them.

Two points to bear in mind are:

  • Many home loan lenders don’t provide bad credit mortgages
  • Each lender has its own policies, and therefore favours different things

If you’d prefer to directly approach the lender yourself, you’re more likely to find success with smaller non-bank lenders that specialise in bad credit home loans (as opposed to bigger banks that prefer ‘vanilla’ mortgages). That’s because these smaller lenders are more likely to treat you as a unique individual rather than judge you according to a one-size-fits-all policy.

Lenders try to minimise their risk, so if you want to get a home loan with bad credit, you need to do everything you can to convince lenders that you’re safer than your credit history might suggest. If possible, provide paperwork that shows:

  • You have a secure job
  • You have a steady income
  • You’ve been reducing your debts
  • You’ve been increasing your savings

Will I have to pay lenders' mortgage insurance twice if I refinance?

If your deposit was less than 20 per cent of your property’s value when you took out your original loan, you may have paid lenders’ mortgage insurance (LMI) to cover the lender against the risk that you may default on your repayments. 

If you refinance to a new home loan, but still don’t have enough deposit and/or equity to provide 20 per cent security, you’ll need to pay for the lender’s LMI a second time. This could potentially add thousands or tens of thousands of dollars in upfront costs to your mortgage, so it’s important to consider whether the financial benefits of refinancing may be worth these costs.

What happens to my home loan when interest rates rise?

If you are on a variable rate home loan, every so often your rate will be subject to increases and decreases. Rate changes are determined by your lender, not the Reserve Bank of Australia, however often when the RBA changes the cash rate, a number of banks will follow suit, at least to some extent. You can use RateCity cash rate to check how the latest interest rate change affected your mortgage interest rate.

When your rate rises, you will be required to pay your bank more each month in mortgage repayments. Similarly, if your interest rate is cut, then your monthly repayments will decrease. Your lender will notify you of what your new repayments will be, although you can do the calculations yourself, and compare other home loan rates using our mortgage calculator.

There is no way of conclusively predicting when interest rates will go up or down on home loans so if you prefer a more stable approach consider opting for a fixed rate loan.

What is a variable home loan?

A variable rate home loan is one where the interest rate can and will change over the course of your loan. The rate is determined by your lender, not the Reserve Bank of Australia, so while the cash rate might go down, your bank may decide not to follow suit, although they do broadly follow market conditions. One of the upsides of variable rates is that they are typically more flexible than their fixed rate counterparts which means that a lot of these products will let you make extra repayments and offer features such as offset accounts.

When should I switch home loans?

The answer to this question is dependent on your personal circumstances – there is no best time for refinancing that will apply to everyone.

If you want a lower interest rate but are happy with the other aspects of your loan it may be worth calling your lender to see if you can negotiate a better deal. If you have some equity up your sleeve – at least 20 per cent – and have done your homework to see what other lenders are offering new customers, pick up the phone to your bank and negotiate. If they aren’t prepared to offer you lower rate or fees, then you’ve already done the research, so consider switching.

How can I calculate interest on my home loan?

You can calculate the total interest you will pay over the life of your loan by using a mortgage calculator. The calculator will estimate your repayments based on the amount you want to borrow, the interest rate, the length of your loan, whether you are an owner-occupier or an investor and whether you plan to pay ‘principal and interest’ or ‘interest-only’.

If you are buying a new home, the calculator will also help you work out how much you’ll need to pay in stamp duty and other related costs.

What is an interest-only loan? How do I work out interest-only loan repayments?

An ‘interest-only’ loan is a loan where the borrower is only required to pay back the interest on the loan. Typically, banks will only let lenders do this for a fixed period of time – often five years – however some lenders will be happy to extend this.

Interest-only loans are popular with investors who aren’t keen on putting a lot of capital into their investment property. It is also a handy feature for people who need to reduce their mortgage repayments for a short period of time while they are travelling overseas, or taking time off to look after a new family member, for example.

While moving on to interest-only will make your monthly repayments cheaper, ultimately, you will end up paying your bank thousands of dollars extra in interest to make up for the time where you weren’t paying off the principal.

What if I can't pay off my guaranteed home loan?

If you can’t pay off your guaranteed home loan, your lender might chase your guarantor for the money.

A guaranteed home loan is a legally binding agreement in which the guarantor assumes overall responsibility for the mortgage. So if the borrower falls behind on their mortgage, the lender might insist that the guarantor cover the repayments. If the guarantor fails to do so, the lender might seize the guarantor’s security (which is often the family home) so it can recoup its money.

How do I know if I have to pay LMI?

Each lender has its own policies, but as a general rule you will have to pay lender’s mortgage insurance (LMI) if your loan-to-value ratio (LVR) exceeds 80 per cent. This applies whether you’re taking out a new home loan or you’re refinancing.

If you’re looking to buy a property, you can use this LMI calculator to work out how much you’re likely to be charged in LMI.

What happens when you default on your mortgage?

A mortgage default occurs when you are 90 days or more behind on your mortgage repayments. Late repayments will often incur a late fee on top of the amount owed which will continue to gather interest along with the remaining principal amount.

If you do default on a mortgage repayment you should try and catch up in next month’s payment. If this isn’t possible, and missing payments is going to become a regular issue, you need to contact your lender as soon as possible to organise an alternative payment schedule and discuss further options.

You may also want to talk to a financial counsellor.