You could save thousands of dollars by switching mortgages

You could save thousands of dollars by switching mortgages

With interest rates falling rapidly in the second half of 2019, now is the perfect time for home loan borrowers to think about refinancing their mortgage.

There are more than 100 different home loan lenders in Australia, which means that even if your home loan offered great value at the time you got it, now there may be other providers offering comparable home loans with lower interest rates, better features or both.

That’s what Marion and Roger* discovered when they compared home loans 10 years into their 30-year mortgage. Marion and Roger had assumed that because their lender was a big four bank, and because they’d been long-time customers, their bank would be rewarding their loyalty by giving them a cheap home loan interest rate. So they were shocked to discover that there were numerous providers offering comparable home loans at lower rates.

* Marion and Roger are not real people. This is a hypothetical case study.

Challenger lenders may offer better value than a big four bank

Marion and Roger had $800,000 left on their mortgage, with a loan-to-value ratio (LVR) of 56 per cent. They were hungry for a better deal.

After doing their research, Marion and Roger decided to refinance to Virgin Money, a lender with lower interest rates than their current provider. They chose the Reward Me Variable Rate Home Loan, which has an interest rate of 3.09 per cent (comparison rate 3.23 per cent). 

One reason Marion and Roger opted for the Reward Me loan was because there was no application fee or valuation fee; just a settlement fee of $150. They also felt the ongoing fee, of $10 per month, was reasonable.

Another reason they refinanced to the Reward Me loan was because of the complimentary Velocity frequent flyer points:

  • 80,000 points at settlement (Virgin Money allocates 1,000 points for every full $10,000 drawn at settlement)
  • 100,000 bonus points at settlement (for borrowing at least $300,000)
  • 1,000 points per month
  • 30,000 anniversary points every three years (while total borrowings are greater than $50,000, net of any balances held in a linked offset facility)

While Virgin Money was a suitable choice for Marion and Roger, it won’t be a suitable choice for all borrowers. That’s why it’s important to do your research before taking out a mortgage.

Think twice before switching home loans

Refinancing is not a decision that should be taken lightly. 

A successful refinance can save you lots of money, as the table above shows. However, it’s also possible to make costly mistakes with refinancing.

One common mistake refinancers make is that despite already paying off their home loan for a number of years, even decades, they switch to a new 30-year loan. This adds years to your repayment schedule and can cost you much more in interest repayments. 

Marion and Roger had 20 years remaining on their loan when they refinanced, so they chose a 20-year loan term when switching to Virgin Money. If they had chosen a 30-year term they would’ve ended up paying more over the life of their new loan (albeit with lower monthly repayments):

Loan term

Monthly repayments

Total repayments

20 years

$4,483

$1,075,898

30 years

$3,422

$1,231,844

Another refinancing mistake is to choose a loan that advertises a lower interest rate, but ends up costing you more. 

Confused? There are two ways that might happen.

  1. Refinancing to a new loan that advertises a lower interest rate, but has higher fees, which increases your total cost. This is why comparison rates are a helpful tool when comparing home loan options.
  2. Refinancing to a new loan that offers a lower introductory rate than your current loan, but the new loan then reverts to a much higher rate once the introductory period ends.

For more information about refinancing, read RateCity’s Refinancing Guide and explore RateCity’s refinance calculator.

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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.

Who offers 40 year mortgages?

Home loans spanning 40 years are offered by select lenders, though the loan period is much longer than a standard 30-year home loan. You're more likely to find a maximum of 35 years, such as is the case with Teacher’s Mutual Bank

Currently, 40 year home loan lenders in Australia include AlphaBeta Money, BCU, G&C Mutual Bank, Pepper, and Sydney Mutual Bank.

Even though these lengthier loans 35 to 40 year loans do exist on the market, they are not overwhelmingly popular, as the extra interest you pay compared to a 30-year loan can be over $100,000 or more.

How much are repayments on a $250K mortgage?

The exact repayment amount for a $250,000 mortgage will be determined by several factors including your deposit size, interest rate and the type of loan. It is best to use a mortgage calculator to determine your actual repayment size.

For example, the monthly repayments on a $250,000 loan with a 5 per cent interest rate over 30 years will be $1342. For a loan of $300,000 on the same rate and loan term, the monthly repayments will be $1610 and for a $500,000 loan, the monthly repayments will be $2684.

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. 

What's wrong with traditional ratings systems?

They’re impersonal 

Most comparison sites give you information about rates, fees and features, but expect you’ll pay more with a low advertised rate and $400 ongoing fee or a slightly higher rate and no ongoing fee. The answer is different for each borrower and depends on a number of variables, in particular how big your loan is. Comparisons are either done based on just today or projected over a full 25 or 30 year loan. That’s not how people borrow these days. While you may take a 30 year loan, most borrowers will either upgrade their house or switch their home loan within the first five years. 

You’re also expected to know exactly which features you want. This is fine for the experienced borrower, but most people know some flexibility is a good thing, but don’t know exactly which features offer more flexibility than others. 

What is the flexibility score?

Today’s home loans often try to lure borrowers with a range of flexible features, including offset accounts, redraw facilities, repayment frequency options, repayment holidays, split loan options and portability. Real Time Ratings™ weights each of these features based on popularity and gives loans a ‘flexibility score’ based on how much they cater to borrowers’ needs over time. The aim is to give a higher score to loans which give borrowers more features and options.

They’re not always timely

In today’s competitive home loan market, lenders are releasing new offers almost daily. These offers are often some of the most attractive deals in the market, but won’t get rated by traditional ratings systems for up to a year. 

The assumptions are out of date 

The comparison rate is based on a loan size of $150,000 and a loan term of 25 years. However, the typical loan size is much higher than that. Million dollar loans are becoming increasingly common, especially if you live in metropolitan parts of Australia, like Sydney and Melbourne. It’s also uncommon for borrowers to hold a loan for 25 years. The typical shelf life for a home loan is a few years. 

The other problem is because it’s a percentage, the difference between 3.9 or 3.7 per cent on a $500,000 doesn’t sound like much, but equals around $683 a year. Real Time Ratings™ not only looks at the difference in the monthly repayments, but it will work out the actual cost difference once fees are taken into consideration. 

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 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 is the flexibility score?

Today’s home loans often try to lure borrowers with a range of flexible features, including offset accounts, redraw facilities, repayment frequency options, repayment holidays, split loan options and portability. Real Time Ratings™ weights each of these features based on popularity and gives loans a ‘flexibility score’ based on how much they cater to borrowers’ needs over time. The aim is to give a higher score to loans which give borrowers more features and options.

What is bridging finance?

A loan of shorter duration taken to buy a new property before a borrower sells an existing property, usually taken to cover the financial gap that occurs while buying a new property without first selling an older one.

Usually, these loans have higher interest rates and a shorter repayment duration.

Savings over

Select a number of years to see how much money you can save with different home loans over time.

e.g. To see how much you could save in two years by switching mortgages,  set the slider to 2.

How is the flexibility score calculated?

Points are awarded for different features. More important features get more points. The points are then added up and indexed into a score from 0 to 5.

How common are low-deposit home loans?

Low-deposit home loans aren’t as common as they once were, because they’re regarded as relatively risky and the banking regulator (APRA) is trying to reduce risk from the mortgage market.

However, if you do your research, you’ll find there is still a fairly wide selection of banks, credit unions and non-bank lenders that offers low-deposit home loans.

What is appreciation or depreciation of property?

The increase or decrease in the value of a property due to factors including inflation, demand and political stability.

How can I get a home loan with no deposit?

Following the Global Financial Crisis, no-deposit loans, as they once used to be known, have largely been removed from the market. Now, if you wish to enter the market with no deposit, you will require a property of your own to secure a loan against or the assistance of a guarantor.