Switching Home Loans

By switching home loans you can save thousands. This guide to home loan refinancing by Savvy can help you reach your financial goals faster.

Last updated on April 27th, 2022 at 10:43 am by Cate Cook

Switching home loans

There are many reasons why you may be considering switching your current home loan.  Changing your home loan can bring many benefits, all of which can save you thousands in the interest you pay over the years.

Changing your home loan, whether or not that involves switching mortgage lenders, needs careful consideration to ensure you make the right decision.  Read on to find out what you should consider before you change your home loan, the steps involved and how Savvy can help you make the best choice by comparing the latest home loan switch offers side-by-side. 

What have I got to gain by switching to another home loan?

There are many reasons why people refinance their home loans. Most revolve around either saving money on the interest they pay, gaining better loan features or getting access to a lump sum for renovations or to clear up other debts.

Save money on the interest you pay

Save money and reduce the interest you pay by:

  • switching to a loan with a lower variable interest rate
  • reducing the risk posed by increasing interest rates and locking in a lower fixed interest rate
  • extending your existing fixed rate term, which can range up to ten years

Switch to access more loan features

Your original loan may not have come with additional features that will help you pay off your loan more quickly in the long term, or assist you to have more control over your finances. These may include:

  • a linked offset account, which allows you to use your wages and savings to offset the principal you owe, thus reducing the interest you pay
  • the flexibility to make free lump sum repayments to pay off your loan more quickly, or to reduce the term of your loan, saving you years of paying interest
  • a redraw facility, which allows you to access any additional loan repayments you’ve previously made, which may prove less expensive than other forms of loans in a situation where you suddenly need cash
  • the ability to bundle all your financial needs (such as a home loan, credit cards, transaction accounts and insurance) into one package with a single annual administration fee, saving you paying multiple admin fees

Access the equity you’ve built in your home

Your home equity is the difference between what you owe on your mortgage and the current value of your home.  This increases as you reduce your loan principal and house prices rise over time.  You can use this equity in several ways:

  • to consolidate debt (by switching to a larger home loan and using the extra money to pay off credit cards, personal loans, car loans or other debt on which you’re paying a far higher interest rate)
  • to gain access to a lump sum for home renovations or extensions (again, by switching to a larger loan and using the additional money to pay for your new bathroom, kitchen or another extension)
  • to buy an investment property (if you have plenty of equity in your home, you can use this in place of a deposit to buy an investment property to rent out)
  • in place of another deposit (you can use it as security for another major purchase such as a caravan, camper trailer or motor home)

All these benefits and cost savings can be achieved by either switching to another home loan with your existing lender, or by changing your mortgage provider and going with another company.  

Talk to your existing lender first – if their answer is no, switch

Talk to your existing lender first about the reasons why you want to switch home loans and ask what fees may be involved and whether they can offer you a better deal. 

If their answer is ‘no’, it’s time to start comparing offers in the market to find a different lender.  This is where Savvy can help you compare new deals to find one which is just right for you and your changing financial needs.

What costs are involved in switching home loans?

There can be costs involved in breaking a fixed term home loan agreement early and establishing a new mortgage, whereas with a variable loan there are no such penalties.  Look out for lenders’ cashback offers, which can often offset the cost of breaking a loan agreement with another lender.  Common costs include:

  • Early exit fees – which can be costly and are based on your loan principal and the amount of time remaining on your fixed loan
  • Mortgage discharge fee – this is the legal cost of officially removing a mortgage from the land title of your property. They vary between states from $160 up to $600.
  • New loan establishment fees – these vary between lenders, ranging from no establishment or setup fees at all to several hundred dollars.  Savvy can help you find the best no-fee loans available in Australia.

Steps involved in switching your home loan

Your questions about switching home loans answered

How long does it take to refinance a home loan?

Refinancing a loan can take anywhere from a couple of days to over a month, depending on the loan complexity and whether you’re switching lenders.  If you are applying for a low doc home loan, for example, you can expect the process to take longer, as your lender will need to take more time assessing alternative documents.

Will my fixed loan break fees outweigh the benefits of refinancing?

Break fees are often a one-off annoyance, especially if you take advantage of cashback offers which lenders offer to entice people to switch home loans.  The benefits of a far lower interest rate can vastly outweigh the comparatively minor cost of break fees in the long term.

Can I stay with my current bank but reduce my loan term?

Yes – it’s possible to talk to your existing lender and ask for a term variation on your loan.  If you’ve been a good and reliable customer, your existing lender may make it easy for you to switch to a loan with a shorter term to help you save overall.

Can I switch my interest-only home loan to principal and interest?  

Yes – it’s quite possible to change from an interest-only (IO) loan term to a principal and interest (P&I) loan, either through your existing lender or a new one. Switching to a P&I loan allows you to gradually pay off your loan principal immediately, thus saving yourself interest in the long term.

What if I don’t have enough home equity for a 20% deposit on my new mortgage? 

If you haven’t built up sufficient equity in your property for a 20% deposit when it comes to switching to your new home loan, you’ll have to find a lender who offers lower deposit loans, which can be obtained for as low as 5% of your property’s value, and either provide a guarantor to access up to 100% of your property’s value or pay Lenders’ Mortgage Insurance (LMI), which can cost thousands of dollars.

If I refinance, will I have to provide all my original loan documents again?

If you are remaining with the same lender, the chances are that you won’t be required to provide all your documentation again.  For example, as an existing client, you won’t need to prove your identity.  However, if you switch to a new lender who doesn’t know you, you’ll be required to provide your documentation again.

Will refinancing negatively affect my credit rating?

No – switching home loans to take advantage of a lower interest rate or to change loan features will not negatively affect your credit rating, although in the future all new lenders will be able to see your credit history.  If you refinance to access more funds, you may find that your credit rating is affected as your debt ratio rises.

What is a top-up loan?

A top-up loan is another name for refinancing a loan and increasing the principal of your home loan to give you access to your home equity.  Such a loan can be used for many purposes, such as home renovations, the payment of school fees, the purchase of a caravan and more.