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Should you switch or negotiate a better rate?

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 apply for a home improvement loan?

When you want to renovate your home, you may need to take out a loan to cover the costs. You could apply for a home improvement loan, which is a personal loan that you use to cover the costs of your home renovations. There is no difference between applying for this type of home improvement loan and applying for a standard personal loan. It would be best to check and compare the features, fees and details of the loan before applying. 

Besides taking out a home improvement loan, you could also:

  1. Use the equity in your house: Equity is the difference between your property’s value and the amount you still owe on your home loan. You may be able to access this equity by refinancing your home loan and then using it to finance your home improvement.  Speak with your lender or a mortgage broker about accessing your equity.
  2. Utilise the redraw facility of your home loan: Check whether the existing home loan has a redraw facility. A redraw facility allows you to access additional funds you’ve repaid into your home loan. Some lenders offer this on variable rate home loans but not on fixed. If this option is available to you, contact your lender to discuss how to access it.
  3. Apply for a construction loan: A construction loan is typically used when constructing a new property but can also be used as a home renovation loan. You may find that a construction loan is a suitable option as it enables you to draw funds as your renovation project progresses. You can compare construction home loans online or speak to a mortgage broker about taking out such a loan.
  4. Look into government grants: Check whether there are any government grants offered when you need the funds and whether you qualify. Initiatives like the HomeBuilder Grant were offered by the Federal Government for a limited period until April 2021. They could help fund your renovations either in full or just partially.  

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.

How do you determine which home loan rates/products I’m shown?

When you check your home loan rate, you’ll supply some basic information about your current loan, including the amount owing on your mortgage and your current interest rate.

We’ll compare this information to the home loan options in the RateCity database and show you which home loan products you may be eligible to apply for.

 

What are the different types of home loan interest rates?

A home loan interest rate is used to calculate how much you’ll pay the lender, usually annually, above the amount you borrow. It’s what the lenders charge you for them lending you money and will impact the total amount you’ll pay over the life of your home loan. 

Having understood what are home loan rates in general, here are the two types you usually have with a home loan:

Fixed rates

These interest rates remain constant for a specific period and are a good option if you’re a first-time buyer or if you’re looking for a fixed monthly repayment. One possible downside of a fixed rate is that it may be higher than a variable rate. Also, you don’t benefit from any lowering of interest rates in the market. On the flip side, if rates go up, your rate won’t change, possibly saving you money.

Variable rates

With variable interest rates, the lender can change them at any time. This change can be based on economic conditions or other reasons. Changes in interest rates could be beneficial if your monthly repayment decreases but can be a problem if it increases. Variable interest rates offer several other benefits often not available with fixed rate home loans like redraw and offset facilities and free extra repayments. 

Is a home equity loan secured or unsecured?

Home equity is the difference between its current market price and the outstanding balance on the mortgage loan. The amount you can borrow against the equity in your property is known as a home equity loan.

A home equity loan is secured against your property. It means the lender can recoup your property if you default on the repayments. A secured home equity loan is available at a competitive rate of interest and may be repaid over the long-term. Although a home equity loan is secured, lenders will assess your income, expenses, and other liabilities before approving your application. You’ll also want  a good credit score to qualify for a home equity loan. 

Can I take a personal loan after a home loan?

Are you struggling to pay the deposit for your dream home? A personal loan can help you pay the deposit. The question that may arise in your mind is can I take a home loan after a personal loan, or can you take a personal loan at the same time as a home loan, as it is. The answer is that, yes, provided you can meet the general eligibility criteria for both a personal loan and a home loan, your application should be approved. Those eligibility criteria may include:

  • Higher-income to show repayment capability for both the loans
  • Clear credit history with no delays in bill payments or defaults on debts
  • Zero or minimal current outstanding debt
  • Some amount of savings
  • Proven rent history will be positively perceived by the lenders

A personal loan after or during a home loan may impact serviceability, however, as the numbers can seriously add up. Every loan you avail of increases your monthly installments and the amount you use to repay the personal loan will be considered to lower the money available for the repayment of your home loan.

As to whether you can get a personal loan after your home loan, the answer is a very likely "yes", though it does come with a caveat: as long as you can show sufficient income to repay both the loans on time, you should be able to get that personal loan approved. A personal loan can also help to improve your credit score showing financial discipline and responsibility, which may benefit you with more favorable terms for your home loan.

Can I get a home renovation loan with bad credit?

If you're looking for funds to pay for repairs or renovations to your home, but you have a low credit score, you need to carefully consider your options. If you already have a mortgage, a good starting point is to check whether you can redraw money from that. You could also consider applying for a new home loan. 

Before taking out a new loan, it’s good to note that lenders are likely to charge higher interest rates on home repair loans for bad credit customers. Alternatively, they may be willing to lend you a smaller amount than a standard loan. You may also face some challenges with getting your home renovation loan application approved. If you do run into trouble, you can speak to your lender and ask whether they would be willing to approve your application if you have a guarantor or co-signer. You should also explain the reasons behind your bad credit rating and the steps that you’re taking to improve it. 

Consulting a financial advisor or mortgage broker can help you understand your options and make the right choice.

How do you find cheap home loans?

With so many interest rate options and repayment types available, finding the cheapest home loan may depend on the type of loan you choose.

Whether you’re looking for an owner-occupier or investor loan, with interest-only or principal and interest repayments, on a fixed or variable interest rate, the cheapest home loan rate available may vary greatly.

One way to find the cheapest option for you is to narrow down your search and compare the options that best suit your individual requirements. RateCity’s home loan comparison tables can help you get started on your search and take the hassle out of shopping around.

Does the Home Loan Rate Promise apply to discounted interest rate offers, such as honeymoon rates?

No. Temporary discounts to home loan interest rates will expire after a limited time, so they aren’t valid for comparing home loans as part of the Home Loan Rate Promise.

However, if your home loan has been discounted from the lender’s standard rate on a permanent basis, you can check if we can find an even lower rate that could apply to you.

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. 

What is a secured home loan?

When the lender creates a mortgage on your property, they’re offering you a secured home loan. It means you’re offering the property as security to the lender who holds this security against the risk of default or any delays in home loan repayments. Suppose you’re unable to repay the loan. In this case, the lender can take ownership of your property and sell it to recover any outstanding funds you owe. The lender retains this hold over your property until you repay the entire loan amount.

If you take out a secured home loan, you may be charged a lower interest rate. The amount you can borrow depends on the property’s value and the deposit you can pay upfront. Generally, lenders allow you to borrow between 80 per cent and 90 per cent of the property value as the loan. Often, you’ll need Lenders Mortgage Insurance (LMI) if the deposit is less than 20 per cent of the property value. Lenders will also do a property valuation to ensure you’re borrowing enough to cover the purchase. 

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. 

Is the lowest home loan rate always the cheapest?

The home loan with the lowest interest rate may not always be the cheapest mortgage option for you. Sometimes a home loan with a low interest rate may charge high fees, which may cost more in total than a mortgage with a higher interest rate and no fees.

Consider checking the comparison rate, which combines interest and standard fees, to get a better idea of the overall cost of different home loan options.

Are fixed rates or variable rates cheaper?

Fixed and variable home loan interest rates are discretionary based on the lender’s decision. They will also be influenced by the Australian economy, as well as the Reserve Bank of Australia’s cash rate. The specific interest rate you may be offered will also depend on your credit history and financial situation.

Whether a fixed or variable rate home loan is the cheaper option for you will depend on all the above, and may still fluctuate over a 25-year home loan term. Therefore, it’s worth comparing your loan options with our comparison tables to see how the rates compare, based on your specific financial needs.