Home stretch: Is it time to change your mortgage lender?
How do those monthly mortgage payments look? Feeling the pain of constant interest rate rises? You’re not the only one.
With the Reserve Bank raising the official cash rate for a record 10 months in a row before a reprieve this month, Australians without a fixed rate have seen their mortgage repayments soar over the past year as lenders pass on the rise to borrowers.
The average variable home loan rate in April 2022 was 2.86 percent, according to the Reserve Bank. Now it’s closer to 6 percent. Anyone with a $500,000 mortgage before the Reserve Bank started putting rates up last May would now be paying up to $1000 more a month.
If that’s you, chances are you’re stressing about how you’re going to keep finding that extra money, especially with Reserve Bank Governor Philip Lowe suggesting there may be further rises in store this year. So, what can you do about it?
Can I ask my mortgage lender for a better deal?
Absolutely. We suggest doing this as a first step, especially if you have been with them for a while and have a good history of making mortgage repayments on time. Have a look at what is out in the market first, so that you have an indication of the rates on offer before asking.
Once you have the knowledge, tell your home loan lender that you are considering refinancing elsewhere, that you need a better deal. Ask them if they can give you the same rate they are offering new borrowers – this is usually the best rate they will have on offer.
National Australia Bank, for example, is offering a variable rate of 5.59% and a 5.63% comparison rate – the interest rate and certain fees and charges related to the loan – for new owner-occupier borrowers. The Commonwealth Bank is offering a variable rate of 5.44% and a comparison rate of 5.83%.
You can also ask to lock in a fixed rate to protect you against future rises – typically for three to five years. As Mortgage Choice points out, there are pros and cons of locking in a fixed rate:
Pros
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- Repayments do not rise if the official interest rate rises
- Provides peace of mind for borrowers concerned about rate rises
- Allows more precise budgeting
Cons
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- Repayments do not fall if rates fall
- Allows only limited additional payments
- Penalises early payout of the loan
Another option is to choose a home loan split between fixed and variable interest rates, which lessens the impact of rate rises without locking you out of any future drops in rates.
You can also ask them about switching from monthly repayments to fortnightly or weekly, which will reduce the amount of interest you pay, as interest is calculated daily, as well as the time it takes you to pay off your loan.
Lenders don’t like losing customers, especially if they’re people on the hook to pay them back for a lot of money over many years, so it’s always worth asking what your existing home loan lender can do for you.
Should I refinance my home loan?
If your home loan lender doesn’t give you a satisfactory answer, don’t just give up. See if you can get a better deal through mortgage refinancing. It’s important to weigh the advantages and disadvantages, however, before you take that step.
Is now the right time?
As with most big decisions, timing is everything. The general rule is if interest rates are lower than your current fixed rate by at least 1-2 percent, refinancing is worth considering. With interest rates at a 10-year high, you’re unlikely to get a better deal if you have taken out a fixed-term loan in the past decade.
But if your loan is variable, the financial pain is considerable at the moment, so it’s worth shopping around to see if you can get a better deal and lock in a fixed rate or a mixture of variable and fixed.
You might also be looking at this as an opportunity to consolidate other debt, such as a personal loan or credit card repayments. If so, ensure the refinance loan is divided so that you can make separate payments to your home loan and other personal debts, otherwise you’ll end up paying those debts over the same period as your home loan. Spread over 25 to 30 years, that lower interest rate for personal debt doesn’t look so good.
How much equity do I have?
Home lenders will want to know how much equity you have in your home. What this means is the difference between what you still owe and the property’s current market value. You will need at least 20 percent total equity in your home, which you should have because most home lenders will only let you borrow up to 80 percent of the property’s value.
If you were allowed to borrow up to 95 percent of your home’s value when you first took out your mortgage, you would have had to pay Lenders Mortgage Insurance (LMI). If you have less than 20 percent total equity in your home, you may still be able to refinance but you may have to pay LMI again.
What if I have a bad credit rating?
This will make it more difficult to refinance but not impossible, particularly if you have a reasonable amount of equity in your home. You'll need to apply for a non-conforming loan, which is in part determined by your property's loan-to-value ratio (LVR) — the more of your home that you own, the less of a risk the lender will deem you to be. Most will require you to have a minimum of 20 percent equity.
Be proactive and get a copy of your credit file – just don’t pay for it - so you can see the information that is given to a prospective lender and get on the front foot about your situation. If you’ve missed credit card or other regular payments, make arrangements with those providers to set up an affordable payment plan, so that you can show potential lenders you have a plan for getting back on track.
It’s also worthwhile involving experts, as it’s a lot more complicated when you have a poor credit rating. A licensed mortgage broker can help you with the application process and put you in touch with specialist lenders who will evaluate your loan with consideration for any difficulties that might have put you in your current position.
What will it cost me to refinance?
In your eagerness to get a better interest rate, don’t forget to ask about all the fees and changes that might be involved with your new lender, as well as any fees associated with breaking your old loan. A lot of the fees associated with buying your first home can rear their ugly head again. These can include home loan application fees, valuation fees, discharge fees, settlement fees, registration fees and exit fees, as well as LMI if you have less than 20 percent equity in your home. This can add up to a whole lot of extras that can make refinancing unattractive - you don’t want to make the switch if what you save in interest rate payments comes out in fees or other hidden charges you neglected to ask about.
Should I use a mortgage broker?
There are good reasons to use a mortgage broker to refinance, number one being that they are property loan experts and generally have a good pool of lenders to draw upon. Most of us have little understanding of the complexities of finding the best home loan or the time to spend working out how to navigate the steps.
But the industry has its sharks, with a number of inquiries finding that some brokers pushed borrowers into loans that were bigger than homebuyers could afford in order to obtain a better commission. In response to the Royal Commission into the financial services industry, the Federal Parliament passed legislation requiring mortgage brokers to act in the best interests of consumers when providing credit assistance.
While this provides you with extra protection, do some research of your own before hiring a mortgage broker. Check their qualifications – as a bare minimum they should have their own Australian Credit Licence or be qualified to act as an authorised credit representative.
Questions to ask your mortgage broker
Consumer group Choice suggests asking the following questions when choosing a mortgage broker:
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- Do you earn more if I borrow more or choose a particular lender? Most brokers receive a percentage-based commission from the bank, not you. This means you could be encouraged to borrow more, or that the broker will encourage you to take up a loan from a particular lender.
- Is your business owned by or associated with a lender? Research shows that broker companies owned by big banks send more loans back to their parent company. Aussie Home Loans, for example, merged with Lendi in 2021 to create Lendi Group, Australia's largest retail mortgage broker. They have more than 1200 brokers but are owned by a number of shareholders including the Commonwealth Bank and Macquarie Bank, so if you’re directed to one of their owners, ask the broker to explain why.
- What's your experience and training? Look for brokers who've been members of the Mortgage and Finance Association of Australia (MFAA) for more than one year – members need to meet a high education standard to belong.
- How many lenders are on your panel? This will let you know how many loans a broker can look at for you – some have lots of options, others hardly any.
- How many lenders did you send loans to in the last year? Ask if they sent more than half, for example, to big banks such as Westpac and ANZ, and only a fraction to other lenders. You want a broker who is prepared to shop far and wide for the best deal.
As part of the fallout of the finance Royal Commission, brokers are legally required to follow responsible lending laws, which includes doing a proper assessment of your income and expenses as well as your financial goals. Ask for a copy of this credit assessment and double check that it matches with what you told your broker – you don’t want to be offered a loan you can’t afford. And if you’re not happy with the rate they have found, you aren’t obliged to go with them. Get a better quote from your bank if you can.
What if I decide to do it myself?
The good news is there are plenty of tools to help you navigate the steps if you have the time or the inclination. The first one enables you to see the comparison rates of a suite of lenders for a quick overview of the best rates available on any given day. You then research those lenders offering the most attractive rates – it's always better to look at the comparison rate, rather than the interest rate, as it includes more (though not all) of the fees involved in the loan.
Canstar’s home loan comparison tool shows the variable rate, the comparison rate, as well as a snapshot of the conditions (such as owner-occupied, the required LVR) for taking out that loan, as well as any incentives, such as $3000 cashback.
Many lenders also have a home loan calculator or mortgage repayment calculator on their websites, so you can see how much you might be up for if you switched to their best rate before you even pick up the phone to talk to someone.
If you do decide to refinance, don’t apply to several lenders at once, as this can have a negative effect on your credit rating. The number of home loan applications you make could appear as a red flag, especially if you get turned down by more than one.
No matter whether you decide to use a mortgage broker or do it yourself, make sure you check your credit rating before you start the process. Aside from knowing what’s been put on file, you will also be alerted quickly to any potential issues, such as identity fraud.
Don’t set and forget
Done some digging and decided you have the best home loan deal for now? That’s great. But don’t get complacent. Your mortgage is your biggest expense so it should be reviewed regularly. The Australian Competition and Consumer Commission’s Home Loan Inquiry in 2020 found that borrowers could save thousands of dollars a year on an average loan simply by asking their existing lender for a better rate. Switching banks could save you a whole lot more.
While rising interest rates and the higher cost of living might prompt more of us to take a closer look at our mortgage, we should never just set and forget. Even if you stay with your existing lender for now, check in at least once a year to make sure they are giving you the best possible deal.
And, as always, if you have experienced any difficulties with a lender or mortgage broker, we’re here to help. Just lodge a complaint with us and we’ll handle it.
