Making an informed decision about change
If you’re thinking about changing your loan to match where you are in life, it’s really worth exploring more than one appealing option.
While a standard home loan term can last 30 years, you shouldn’t feel like you’re stuck with that particular loan. There’s a lot that can happen in the space of a few years – let alone 30. You might want to move. You might need a bigger (or smaller) house along the way. Our lives change, and your home loan can change with you.
It’s always a good idea to make sure your home loan suits the stage of life you’re at. It may not just be about the house itself – perhaps you want different features attached to your loan.
There are many options out there – but don’t be tempted to sign up to the first good deal you see. If you find a loan that’s mostly suitable, keep looking! You’ll find the right one, and the doing a little research upfront can save a lot of hassle.
Switching interest rate type
Home loans typically have two types of interest rates: fixed and variable. It’s usually quite easy to go from variable to fixed, but unfortunately, going the other way can prove costly.
Paying to end or start a loan
The Federal Government got rid of exit fees from 1 July, 2011—but this is only for contracts signed after this date. If you signed before then, you may pay exit fees for ending your loan early. Check with your lender if you’re unsure.
On the other hand, when you sign up for a new loan – especially if it’s with a new lender – you may have to pay start-up costs, like an application fee. This information is always available beforehand, so make sure you ask.
Another, sometimes expensive, cost involved in switching a loan is economic cost.
Having a fixed-rate home loan means you’ve agreed to an exact interest rate for a certain period. If you end your loan before this period ends, your lender may charge you economic cost—an estimate of their loss resulting from the change. Since your lender suffers loss when you break a loan term, it’s a cost you need to pay, so get a quote before doing anything (if you have a fixed-rate loan).
Choosing a loan term
If you have a loan where you can choose the term, it’s important to do your sums first. The shorter the loan term, the less interest you’ll pay—but your repayments will be higher. If you choose a longer-term (say, 30 years) your repayments will be less but you’ll pay more interest.
Belinda and Pete
Belinda and Pete want to move from their one-bedroom inner-city apartment to a three-bedroom house in the suburbs. They don’t just want more space, they’re going to need it when bub arrives.
Together, they earn $120,000. Their monthly expenses are around $3,000. If they borrow $700k over 30 years at a rate of 5.88% pa, their monthly repayments will be $4,143. But if they halved their loan term to 15 years, they’d pay $5,862.
So, they pay more in the short term, but they won’t pay anywhere near as much as they would in the long run. These are things to consider while you’re looking for a new loan.
Australian Securities and Investments Commission has some useful information for customers interested in using an interest-only repayment period as part of their loan term. Check out their MoneySmart guidance for some easy to follow infographics highlighting the pitfalls and benefits of this type of lending structure. You can also find examples of how much you may expect to pay for this type of loan structure.
Here is a more detailed explanation and case study to help demonstrate the differences in this article interest only vs. principal and interest repayments.
Doing it for the benefits
In addition to your loan, you might be thinking about getting a new credit card or an offset account attached to your loan. Think about how a travel company will put together an all-inclusive holiday package – most lenders can put together a cost-effective package to include all your banking products to make managing them even easier.
There are other benefits that may encourage you to switch, like being able to redraw funds or a loan that lets you take a repayment holiday. Don’t forget to always weigh up these new benefits with the cost and effort involved in switching to a new loan.
Reproduced with permission of National Australia Bank (‘NAB’). This article was originally published at https://www.nab.com.au/personal/life-moments/manage-money/manage-debt/switching-home-loans
National Australia Bank Limited. ABN 12 004 044 937 AFSL and Australian Credit Licence 230686. The information contained in this article is intended to be of a general nature only. Any advice contained in this article has been prepared without taking into account your objectives, financial situation or needs. Before acting on any advice on this website, NAB recommends that you consider whether it is appropriate for your circumstances.
© 2022 National Australia Bank Limited (“NAB”). All rights reserved.
Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business nor our Licensee takes any responsibility for any action or any service provided by the author. Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.