What should you consider before switching home loans?

If your current home loan is no longer serving you, you may be contemplating switching to a more competitive option.

As your mortgage Is arguably your biggest expense over your lifetime, you’ll want to ensure you cross your t’s and dot your i's when it comes time to choose your new loan option

There are a number of factors involved in the refinancing process that can impact not only the cost of switching, but the interest rate a new lender offers you or whether you’ll gain loan approval or not.

Let’s explore the key factors to consider before switching home loans.

Identify your refinancing goals

Before you begin the process of refinancing, you’ll want to take stock of what isn’t working with your current home loan and what your goals are for a new home loan. This could mean you’re looking for:

• A lower interest rate
• Fewer fees
• More flexibility, such as being able to make extra repayments
• Helpful features, like an offset account or redraw facility
• A new fixed rate or a competitive variable rate
• The option to split your home loan rate
• The ability to access equity in your property

By understanding your refinancing goals, you’ll be able to better choose your next home loan.

What to consider before refinancing

• What is your financial situation?

Just because you gained home loan approval once doesn’t mean it’s guaranteed to happen again. When you refinance you’ll be applying for a new home loan and the lender will assess your financial situation as your current lender once did to ensure you meet its eligibility criteria.

This means that if your financial situation has changed, such as a reduction in income, changing jobs recently, a decrease to your credit score or you’ve taken on a new debt, like a car loan, this may impact not only the interest rate a lender may offer you but your likelihood to gain loan approval.

Take time to ensure your finances are in a healthy position before you consider refinancing, such as:

• Working to boost your credit score
• Waiting to apply after you’ve left a new job’s probation period (3-6 months)
• Paying off your debts before you apply

• What is your LVR?

Also keep in mind that if you’ve only been with your current lender for a year or two you may not have paid down enough of your mortgage to reduce your loan-to-value ratio (LVR). Lenders typically favour borrowers with LVRs below 80% for their more competitive home loans.

If your refinancing goals are all about affordability, you may find that a lender will not approve you for its lowest interest rate if your LVR is not below 80%, or below 60% in some instances. Consider working to pay off your mortgage for a few more years before you switch to a new lender to increase your chances of meeting your goals.

• What is your loan term?

If you only have a few years left on your home loan, a new lender may put you on a mortgage with a longer loan term. The longer the loan term, the longer you’re saddled with debt and the more interest you will pay.

It may be worth calculating the potential cost of refinancing to a longer loan term versus just sticking it out with your current lender and paying off your debt as quickly as possible.

• What type of lender do you want?

Choosing the right lender for your home loan is almost as important as choosing the home loan itself. If you’ve only ever stuck with your childhood bank it may be worth taking the time to research if a different type of lender may suit your goals and financial needs better

A big bank may offer several perks, such as a sense of security and increased convenience in terms of customer service and having all your financial products in the one spot. If you rely on face-to-face customer service, for example, a big bank offering easy branch access may be your priority.

However, a smaller lender, like an online bank, may be able to offer lower interest rates or fees by having fewer overheads (like branches) as they’re based all online. They may also offer more innovation in terms of fintech, so those who are tech-savvy may prefer this type of lender.

• What perks are in it for you?

There’s more to consider about a new home loan than the interest rate you may be offered. As switching home loans can incur fees, such as an exit fee if breaking a fixed rate term early or an application fee with the new lender, you may want to compare options that offer cashback deals.

Cashback deals can range from $1,000 to $10,000, depending on the lender and the size of your mortgage. A home loan lender may offer you cashback to encourage you to come on to their books. This can be put towards your switching fees, or even towards a new appliance for the home or straight into your home loan

How to compare refinance home loans

Now you know what your refinancing goals are and what to consider before you make the switch, it is time to compare your options and make a short list.

One of the easiest ways to compare home loans is to use a comparison table. RateCity’s refinance comparison tables allow you to compare apples with apples, meaning you may filter down and view several options that could suit your needs side by side. This allows you to easily compare potential interest rates, fees, and features offered by a lender.

Compare home loans in Australia