If, like for many Australians, the recent interest rate rises have inspired you to do some financial soul-searching, you may be considering switching your home loan. It warrants a lot of careful research, but as the numbers show, it is possible to save big.
“There’s a fair range of over one per cent difference between the best and the most dear [home loan] in the market,” says Shaun Cornelius, CEO of InfoChoice. “On average most people will find that there’s about half a per cent interest savings through refinancing… and that’s a fairly conservative view.” Half a per cent equates to a saving of $125 per month on a $300,000 interest only loan.
Harry Senlitoga, Senior Financial Analyst at Canstar Cannex agrees. “Just looking at the major banks alone… there’s 27 basis points difference [in the standard variable rates], which is more than one [0.25 per cent] rate rise.” ¹
Senlitoga says that the global financial crisis has affected pricing. “It has changed the landscape of the mortgage market, in the way that whoever offered the cheapest [rate] 18 months ago may not necessarily today.”
Even among the cheaper rate loans, there are savings to be made. A borrower with a $300,000 loan on a current variable rate of 5.79% could potentially save hundreds of dollars a year by refinancing to another loan with a slightly lower rate. Online resources, like Aussie’s 1 Minute Mortgage Explorer, can be helpful to see how much you could potentially save.
But before you go diving into the loan with the cheapest interest rate, it’s important to remember a few key points:
- Not all home loans are the same – the features, benefits and flexibility all contribute to the price, and you need to determine which of those are important to you.
- Look at the savings over the long term – not just in the first year or two.
- Consider your plans for the use of the product. Senlitoga says, “It may have the cheapest rate, but it could come with restrictions”. Restrictions such as hefty charges to redraw surplus funds may add up if you’re planning on making a few withdrawals.
- Weigh up the costs of leaving the old loan (exit fees, deferred establishment costs, break costs) and the cost of entering the new loan (application fees, valuation costs, legal fees).
“The big one is looking at the exit fees on your existing home loan,” says Cornelius. “Every product has a different way of calculating exit fees. Bring out your contract, have a look at your documentation for your existing home loan and check with your bank what that exit fee is.”
That exit fee could make all the difference when determining whether there are real savings to be had.
An example can be drawn from the comparison table on the InfoChoice website. A borrower on a variable interest rate of 5.96% p.a. with Bank A, could be well tempted to refinance to Bank B, offering a variable interest rate of 5.79% p.a. According to the comparison table, the borrower would save $484 over a five year period by making the move. But once the exit costs for Bank A are considered – a $160 administrative fee plus a $700 deferred establishment fee (if the loan is closed within three years), the borrower could end up worse off.²
But in another example from the InfoChoice table, the savings are worth the even heftier exit fees. A borrower refinancing from Bank C, charging a 6.34% p.a. variable interest rate to Bank A with a 5.79% p.a. variable interest rate could save $4,989 in interest over five years. Even after the $1000 exit fees that apply if Bank C’s loan is closed within three years, there’s plenty of savings leftover.³
On variable rate loans, an exit fee may be applicable if you had taken out the loan within the last few years, and the fees charged vary greatly. “Major banks typically range from $700 to $1000 if you break the loan within the first four years,” says Senlitoga. “But some of the other lenders might charge you a percentage of the initial loan amount, which can be as high as 1.5%.” For an original loan limit of $250,000, that equates to $3,750 in exit fees.
And if you’re in a fixed rate loan the news could be even worse, as the economic cost of breaking the loan is passed on to you. “If you’re in the early stages of that fixed rate loan – the first three years, you’re generally going to be up for a pretty hefty exit fee,” says Cornelius.
Getting a better home loan deal is not as straight-forward as moving to the cheapest rate around. But if the sums show that the savings outweigh the costs, dive on in.
1 Based on standard variable rates quoted by the big 4 banks as at 20.01.10.
2 Five year cost and interest rate comparisons as sourced from www.infochoice.com.au on 29.01.10, based on a variable rate loan of $300,000.
The loan examples quoted may not be available from Aussie, and therefore should not be treated as an offer by Aussie to supply those loan products.