You’ve been with your bank for years, so they’ll definitely give you a good deal on your home loan, right?
Not necessarily. Banks are loyal – but to their shareholders, not their customers. That doesn’t mean they’ll give you bad service; many banks provide excellent service. But banks, like any other business, exist to make profits. So you can’t assume they’ll reward you for your loyalty.
Veronica* was shocked when she discovered that her bank, where she’d been a customer for years, was charging her more in interest for her home loan than some other lenders in the market. So she decided to refinance and take her business elsewhere.
Refinancing to a cheaper home loan
Veronica was five years into a 30-year home loan. Originally, she’d borrowed $400,000 to buy a $500,000 property, giving her a loan-to-value ratio (LVR) of 80 per cent. Now, after five years, her loan had been reduced to $366,000, while her property had climbed in value to $600,000, giving her an LVR of 61 per cent.
Most mortgage lenders prefer to work with borrowers who have LVRs of 80 per cent or less, so you could be in a good position to refinance if you have at least 20 per cent equity in your home. If, like Veronica, you have 39 per cent equity, your position might be even stronger.
After comparing home loans from a range of big banks and challenger institutions, Veronica decided to refinance with UBank, an online lender.
Low interest rates are one factor to look for when refinancing, as it could potentially save you thousands of dollars over the course of your mortgage.
For example, Veronica’s current lender was charging her 3.38 per cent interest. By switching to UBank, Veronica reduced her home loan interest rate to 3.09 per cent (comparison rate also 3.09 per cent)^. This interest rate is scheduled to fall to 2.84 per cent on 29 October, due to the recent Reserve Bank rate cut. Even before the coming rate cut, Veronica could be on track to save more than $17,000 over the final 25 years of her mortgage (assuming the same interest rate for the rest of the mortgage term, which is unlikely).
As with all financial products, it’s important to weigh up various home loan interest rates before signing the dotted line. Apart from interest rates, the time you invest to do your research in the loan’s fees and features will pay off in the long run.
Can you avoid pesky fees?
When Veronica compared loans, she knew she wanted to reduce the amount of fees she was paying.
UBank doesn’t charge application fees for its variable home loan (although Veronica’s previous lender imposed a $350 discharge fee when she closed her mortgage). UBank also doesn’t charge ongoing monthly or annual fees, which means all the money Veronica contributes to her mortgage goes to paying it down.
Another reason Veronica chose UBank was because it doesn’t charge her a fee to use the redraw facility and won’t charge her a discharge fee when she gets to the end of her home loan.
There are a range of upfront and ongoing fees your lender may be charging you. If you're considering refinancing your home loan, don't forget to compare potential fees and additional costs so you can reduce more than just your interest rate.
Why you might not want to refinance
Refinancing can be a smart move for some borrowers, but it’s not for everyone.
- If you feel like you’re getting good service and good value from your mortgage lender, there might be no reason to go elsewhere.
- If you’re concerned your interest rate is a bit high, you might be able to get it lowered just by calling your lender and threatening to take your business elsewhere if they don’t cut your rate.
- If you’re near the end of your mortgage, any savings you might make by switching to a cheaper home loan might be outweighed by the time and money you need to invest in refinancing.
The other point borrowers should consider is that while interest rates are important, they’re not the only thing you need to consider when comparing home loans. Other factors, such as fees, loan features and customer service, are also important.
* Veronica is not a real person. This is a hypothetical case study.
^ Data accurate as of 11 October 2019.