Thinking about switching home loans?
For many Australians, their home loan is their biggest financial commitment. In times of rising interest rates, it’s a good idea to take stock of your finances and see whether you’d be better off switching from your existing loan to one that charges a lower interest rate or has other features that suit you better.
There are hundreds of home loans on the market offered by a wide range of lenders and you could save yourself thousands of dollars in interest by getting the right deal. Before you switch it is important to shop around for the best deal and work out how much it will cost you.
For example, you might decide to switch your home loan from one lender to another because you can get a slightly better interest rate. If so, it is important you consider the cost of switching before you decide. Ask yourself, 'is the cost of switching worth the potential interest rate saving?'.
FIDO offers a home loan switching checklist to help you shop around and decide whether or not to switch home loans, either to another lender or another type of loan with your current lender.
ASIC has completed a review of home switching fees and produced a report on the findings. Read the report
Why do interest rates change?
The Reserve Bank of Australia (RBA) sets the official ‘cash rate’. When the RBA increases the cash rate, lenders normally increase the interest rate they charge on their loans. Lenders may also independently change their interest rates even if the RBA has not changed the cash rate. This is because lenders obtain the funds they lend out as home loans from other sources. If the cost of money from those other sources goes up they will generally pass that increased cost on through higher interest rates on the home loans they provide.
Changes to interest rates are usually in increments such as 0.25%. These variances may seem small, but they can make a significant difference to the amount of your regular repayments, and over the duration of the loan.
Find out more about paying off your home loan faster.
The comparison rate
The comparison rate is a better indicator of the real cost of a loan. Different home loans have different interest rates, can be fixed or variable, and have different fees and charges. This makes comparing home loans difficult. For this reason, lenders must provide a 'comparison rate' on all home loans.
The comparison rate includes the interest rate plus most fees and charges. For example:
| Home loan A has an interest rate of 8.00% and a comparison rate of 8.50% due to the fees and charges. |
| Home loan B has an interest rate of 8.25% and a comparison rate of 8.35% because it has fewer fees than home loan A. |
In this example, home loan B costs less than home loan A despite home loan A having a lower interest rate. However, you should keep in mind what features are being offered by each loan to get the full picture.
You need to be especially careful with early termination fees, as these are not included in the comparison rate. If you end the loan early, and most loans do end early, high early termination fees can change a loan that looked cheap, and had a low comparison rate, into a very expensive loan.
For example, home loan C might have a low comparison rate but an early termination fee of 2% of the amount borrowed if the loan is ended in the first three years. If you had to end the loan early, the cost of the early termination fee might negate the low comparison rate.
For more explanation of comparison rates see FIDO's information on the Consumer Credit Code.
More on home loans
FIDO Website: Printed 07/31/2010
