When done right, switching home loans can produce significant financial benefits -- but you need to properly understand the consequences of moving to another mortgage. So, as we head into the final hours of the big Switch & Save home loan sale, here's our handy list of the top 5 traps to avoid -- to make sure you're a savvy switcher.
1. Switching to a more expensive loan
It seems strange that someone might accidentally move to a dearer mortgage, but it can happen if borrowers confuse short-term special rates with long-term ‘real rates’.
Many lenders perform a legal version of bait-and-switch by tempting borrowers to refinance with a special honeymoon rate that then reverts to the more expensive ‘real rate’ after, say, one year.
Solution: Look at your potential new mortgage’s comparison rate, which is the real rate you’ll pay once the lender starts making you pay all the loan’s fees and charges.
2. Switching to a less flexible loan
One of the big advantages of refinancing is being able to move to a cheaper mortgage. However, for some people, cheaper won’t always be better.
For example, some borrowers might assume that because their current mortgage has an offset facility or allows them to make extra repayments, their new one will too – only to find out when it’s too late that it doesn’t.
Solution: Look at all the features and benefits of the potential new mortgage rather than just the rate.
For 40 hours only from Monday May 8 to 10pm AEST Tuesday May 9, some of Australia’s most competitive lenders will be cutting home loan interest rates, slashing fees and putting cashback offers on the table. You can enter your current home loan’s details and find out how much you could could save by switching in less than 60 seconds. Just some of the deals include:
• Reduce Home Loans offering the low rate of 3.39% (comparison rate 3.39%), for its Rate Buster Essentials 100% Offset Variable product. That’s a reduction of 10 basis points.
• ING Direct is giving borrowers $1500 cashback if you switch to one of its three products on sale. The best rate is the Orange Advantage Home Loan (Principal and Interest) at 3.79% (CR 4.01%).
3. Switching to the wrong type of loan
Whether your current mortgage is variable, fixed or a combination of the two, it’s human nature to think the grass is greener on the other side.
Rates move up and down all the time, so just because your loan structure isn’t delivering you maximum benefit right now, it doesn’t mean it’s not the best long-term option.
Refinancing can be very effective if it’s a well-thought-out decision, but it can go wrong if it’s an emotional, impulsive decision.
Solution: Consider both the financial costs of switching and how the new loan structure would affect your long-term financial position.
4. Switching without switching
Some borrowers make the mistake of refinancing with their existing lender without shopping around.
It seems like a big win, because it allows them to move to a more suitable loan with a minimum of fuss.
However, it’s more likely to be a lost opportunity. Australia has dozens of home loan providers offering hundreds of mortgage products – so if a borrower realises their current lender isn’t giving them value for money, what are the odds that lender will be the best option the second time around?
Solution: You don’t have to stick with what you’ve got.
5. Refinancing when your home has lost value
You could take a significant financial hit if you switch mortgages in a falling market.
Imagine you originally took out a $390,000 mortgage to buy a $500,000 property – that would’ve given you a loan-to-valuation (LVR) ration of 78 per cent. If you’d since reduced your debt to $375,000 but your home’s value had fallen to $450,000, your LVR would’ve worsened to 83 per cent.
The new lender might decide that because your LVR is now above 80 per cent, you will have to pay a higher rate and even pay lender’s mortgage insurance (LMI).
Solution: Try to delay refinancing until the property market has turned in your favour.
How to get refinancing right
Although refinancing can sometimes go wrong, borrowers who do it correctly can improve their financial position and unlock equity in their home.
To make refinancing easier, RateCity has created the Switch & Save Sale, which will give borrowers access to market-leading rates.
Borrowers who are with ANZ, Commonwealth Bank, NAB or Westpac could even save up to $39,000 over 15 years by switching through the Switch & Save Sale.
RateCity arrived at that figure after calculating how much borrowers would save if they switched from an average-sized mortgage from the average discounted variable rate offered by one of the big four banks to the lowest variable rate in the Switch & Save Sale.
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