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Switching home loans

Your home loan might have been the best one you could get when you took it out but it can pay to think about switching to a new one. New loan products come onto the market all the time. If you are not happy with your loan, shop around. You may be able to get a better deal by switching to another lender or to another type of loan with your current lender.

Switching home loans could save you money but it pays to be careful. Choosing the wrong loan for you could be costly.

Shop around for a better deal to see if you could pay less interest and see if there are products out there that offer you better or cheaper features.
Calculate the costs of switching, there may be a cost from leaving your current loan early (exit fees) and there may be a cost from the lender that you are moving to (start up fees).

Shop around for a better deal

When it comes to the cost of your home loan, interest usually takes centre stage. It pays to compare the interest rate you are charged with that charged by other lenders. What might seem only a slightly lower rate could end up saving you thousands of dollars over the life of a loan. Check our calculators to see how much interest you could save over the life of your loan if you switched to a lower interest rate.

You could switch from a variable to a fixed interest rate (or vice versa). Under a fixed rate you'll know exactly what your payments are over a set time (usually up to five years). With a variable rate your payments will rise and fall as interest rates change.

Advertising and information about loans shows interest in two ways: the interest rate you will pay, and the so-called 'comparison rate' that includes interest plus fees and charges. It is a guide that lets you compare different products but it won't be a complete picture of what you may pay because some fees and charges are not included.

You may be able to find a loan with lower fees and charges than your current one. Go through your paperwork and old loan statements and make a list of what you are paying. Lenders have to include details of fees and charges in their product information.

Check out other loan features. For example:

Some home loans allow you to redraw any extra money you may have paid into your loan account.
Some home loans allow you to deduct from the amount you owe any money you have in accounts you have linked to your home loan - this can reduce the amount of interest you pay.

Extra features may come with higher fees but it's worth taking them into account when you shop around.

Don't be put off if your home loan is bundled with one or more of your bank accounts. Financial institutions are working to make it easier to switch all kinds of accounts. Ask whether you can switch the whole bundle. If you can't, ask what effect switching the home loan will have on the rest of the bundle.

It pays to look at a number of products before you sign up. If you already have a home loan, look at a number of alternative products from time to time, especially if your needs change or if the cost of your loan increases.

The money pages of many magazines and newspapers have articles and advertisements that let you compare interest rates, features and fees and charges. Websites such as Cannex and Infochoice also provide detailed information that lets you compare different loans.

You can read more about finding the best deal on a loan in our articles Understanding credit and Controlling your debts.

Calculate the costs of switching

It can cost money to switch a loan because you may be charged exit fees and start up fees.

Exit fees are what you'd be charged by your current lender to get out of your current home loan. To find out what you'd be up for, check your home loan contract. If in doubt, contact your lender. Lenders may use different terms for exit fees such as:

Switching fee
Early termination fee
Early Discharge
Discharge fee
Deferred start up fee

There is a big range of exit fees. Many people could find themselves paying around $2000 but you could pay several thousand dollars or nothing at all, depending on what product you have and how long you have had the loan. It pays to do your homework and find out how much you would be up for.

Tip

If you feel comfortable doing so, some of the switching costs may be negotiated as part of a better deal with another lender. A new lender may be willing to cover some of these costs.

Start up fees are the costs you'd pay for another lender to take over your home loan.

Lenders may use terms for start up fees such as:

Application fee or
Set up fee

The start up fees for different home loans can vary a lot. They could be less than $100 or closer to $2000 depending on the mortgage product. As always, it pays to do your homework and shop around for a good deal. Find out more about up front costs and choosing a loan in our article Buying your home.

The bottom line

The less you have to pay in exit fees and start up fees, the more potential there is for you to gain from switching your home loan.

Switching home loans checklist

Switching home loans is a big decision. So don't rush it. Take the time to work through the checklist.

Work out what your current loan is costing you
Make a note of the features you want in a home loan
Look at a number of alternative home loans (at least 3) that give you the features you want and work out how much these loans would cost you
Consider any start up costs and exit fees you may be faced with
Talk to a few financial institutions, including your current provider, to find out the best deal they're prepared to offer
Finally, decide whether you will be better off by switching lenders, switching products or staying put.

What else can you do?

If you're thinking about switching because you are feeling financially stretched and are worried that you can't make your loan repayments there are a number of things you can do:

Revisit your budget - are there any expenses you could cut down?
Talk to your lender about your options - they may have ideas that can help you manage better.
Take a good look at your loans and credit cards - could you use cash instead or could you make larger repayments to clear the debt faster?
Get advice if you're not sure - don't rush into any big decisions and don't feel pressured into agreeing to anything you don't understand or aren't comfortable with.

There are lots of places you can get free information and advice to help get your money under control. Find out more in our article Getting Information and Advice.