Home Loans Savings Guide
It's the biggest bill in most household budgets, which is why home loan savings can add up to thousands of dollars.
How to find a cheap Home Loan
The internet has given borrowers more power than ever before to find a cheaper Home Loan interest rate.
With so many online comparison sites, finding the cheapest home loan is now easy. (Whether you’ll be eligible is another matter, but more on that below.)
Follow these 6 steps to find the cheapest rates around:
- If you already have a mortgage, check your current interest rate and fees so you know what you’re paying.
It should be on your bank statement, or you can ask your lender.
- Go to a comparison website to see what else is out there. Here are a few of the best:
COMPARISON WEBSITE RANGE Ratecity.com.au* Compares 100+ lenders mozo.com.au Compares 80+ lenders Finder.com.au Compares 60+ lenders Canstar.com.au Compares 100+ lenders
- Enter your loan size and other information at the comparison site and see what offers it displays.
Most sites will show you ‘promoted’ or ‘partner’ offers first, rather than showing you the ABSOLUTE cheapest. These are often very good deals, but if you want the absolute cheapest, look for a link or a button that says ‘show all offers’ or ‘show offers without links’. As a general rule, if the site has a button linking to the provider, they’re partnered.
- Check the comparison rate!
To stop lenders from hiding all manner of fees behind a super-low interest rate, they MUST quote this number, which takes fees into account. ASIC Moneysmart says: “It reduces to a single percentage figure the interest rate plus most fees and charges relating to a loan.”
- Bear in mind that the ABSOLUTE cheapest loan isn’t always the best one for you.
You’ll need to decide what features you can’t do without. Need an offset account? Some loans don’t have them. A Redraw facility? Ditto. Not prepared to leave the big banks? Be prepared to pay a bit more for the privilege. Once you know your non-negotiables, you can adjust your search accordingly.
- Pick a winner and switch or negotiate.
Raising a better offer with your current lender will usually result in a counter-offer. Even if you have a mortgage broker, this exercise is worthwhile. Now you can show them the loan you’ve selected and ask them if they can negotiate with your current lender on your behalf – or find a better one.
9Saver Partner offers RateCity Low Home Loan Rates
How to know if it's the right time to re-finance
To re-finance, or not to re-finance? Weigh up the reasons for and against below to work out if now is a good time for you to change your loan.
Reason FOR: You could save thousands of dollars
You can sometimes save over $1000 a year with a lower interest rate. You might also be able to find a new loan without the same ongoing fees as your current loan.
Let’s say you have a $350,000 loan paying principal & interest at a variable rate of 4.5% p.a. with monthly repayments. By switching to a 25-year loan with a variable rate of about 3.8% p.a., you could save $1637 a year!
Lenders will offer you incentives to switch too, so keep an eye out for these when shopping around. They can include as much as $2000 in cashback or gift cards, or hundreds of thousands of frequent flyer points, or waived fees, or specially discounted interest rates.
Reason FOR: You can access equity in your home.
If you need money to renovate, invest, or buy something, re-financing can be a way to release some of the value you’ve built up in your home. Changing to a loan with a redraw facility or another way to access the funds, for example, allows you to access funds at the same interest rate as your mortgage.
Reason FOR: You could pay off your loan faster.
By shortening the length of your loan, you could end up paying it off faster. But beware that your repayments will also rise, so you’ll need to be able to cover that.
Reason FOR: You could fix.
A fixed rate loan locks in your rate for a set period of time. When fixed rates are low, as they are right now, it can be a great way to make your interest costs and repayments predictable for the next year or 2 or 3 or 4 or 5.
Reason FOR: You could find a loan better suited to your life stage.
You might need an offset account or a redraw facility or a line of credit home loan, as you grow older and your needs change.
Reason AGAINST: You might already be on a great deal.
If you’re on a good wicket, why re-finance? But it pays to shop around and see if you’re still getting the right treatment from your lender every year or two. To shop around, follow the 9Saver Guide to ‘How to find a cheap home loan’.
Reason AGAINST: Fees, fees, fees…
Common Fees when closing out a loan
- Discharge Fee, to get out of your old loan: $200-$400
- Exit fee (if you took our your loan before July 2011, or you have a fixed rate loan): can cost thousands
Common Fees when taking out a new loan
- Application/establishment fees, to cover the costs of opening your loan: $200-$600
- Valuation fees, to pay an independent valuer to assess the property: c$300
- Settlement fees, for the lender to arrange the funding: $100-$300
- Legal fees, for the lender’s solicitor: $75-$150
- Package fees, a monthly cost that some lenders charge in exchange for giving you a discount on the variable rate: $100-$500
- Lender’s Mortgage Insurance, if you’re borrowing over 80% of the property value: can cost thousands
Reason AGAINST: Your Credit Rating
Your Credit Rating is the number lenders use to assess your credit history and decide how likely you are to pay them back. It’s been called your “financial CV”!
It can have a positive OR negative impact on the interest rate you get. And making repeated applications for loans or credit cards or other credit products within a short period of time can lower your Credit Rating. So be careful.
You can read more about Credit Scores and how to check yours for free at ASIC Moneysmart.
9Saver Partner offers RateCity Re-finance Home Loans
Variable versus Fixed Rate Loans
Are you better off with a variable rate or a fixed rate loan? Or a mixture of the two (aka a split loan)?
That all depends on you, and what’s most important to you.
Want to know exactly what your loan will cost you for the next year or 2 or 3 or 4 or 5? Considering fixing!
Prefer to gamble on variable rates going down over that time? Go variable!
Here are some pros and cons of fixed-rate loans, and a few recommendations from our partners:
|Predictability: Fixing your interest rate gives you the ability to plan around what your home loan costs will be, without surprises.||Inflexibility: If you decide to move, or your financial circumstances change, you might have to pay to get out of a fixed rate loan.|
|Savings: If you get a good fixed rate and variable rates rise, you could end up saving money on interest. But there is no guarantee. You might end up paying more or less over time – it all depends on your timing and the rate you lock in.||Fees: Some fixed rate home loans have a fee when you apply. Also, because the lender is promising you a fixed rate for a fixed period, they are allowed to charge you an exit or break fee if you end the loan early (unlike variable loans, which cannot have exit fees since July 2011).|
9Saver Partner offers RateCity 3yr Fixed Rate Loans
Should you use a broker or deal direct with lenders?
More than half of all mortgages in Australia go through a mortgage broker.
When deciding whether to use a broker or to deal direct with lenders, here is what you need to think about:
The Benefits of Brokers
- Discounts: Brokers buy in bulk, so they might be able to get a better deal than you from certain lenders. The flipside of this is that they often steer you towards the lenders they prefer to deal with! So they may not compare the whole market for you.
- Paperwork: Brokers take care of a lot of the red tape involved in a loan application, which can be confusing for those of us who don’t deal with it day-in, day-out.
- Customer service: Brokers are middle-men (or women). They save you time comparing all the loans out there and when dealing with banks and other lenders, it can be a relief to have someone in your corner to stick up for you or push their weight around if need be. Brokers perform this role for a lot of customers.
The Benefits of Dealing Direct with Lenders
- Control: Brokers prefer certain lenders, because their commissions get bigger according to how much business they can send to a particular lender. So using a broker might mean you’re channelled towards a particular product, when you wanted someone to compare the whole market for you.
- Risk: Brokers’ clients tend to borrow more and take on more risky loans such as interest-only loans, according to research by ASIC.
- Cost: Brokers get paid by the lender, so they don’t charge you directly. But all up, brokers get over $2b in commissions a year and that adds 16 basis points to the cost of the average home loan, according to a UBS report.
Some of the cheapest home loans on the market are NOT sold through brokers, so that they don’t have to cover the cost of the commission. If you’re prepared to do the extra work yourself, you could get a lower rate.
4 Quick Questions for a Broker at your first meeting:
- How many lenders do you deal with?
- Which lender do you put the most loans through and why?
- What are the upfront costs of the loan?
- Are you a member of the MFAA? (This is the peak body for mortgage brokers in Australia and requires members to abide by a Code of Practice.)
The Mortgage Industry’s Worst-Kept Secret
All lenders advertise their “standard variable rate” for home loans, but it’s an open secret in the mortgage industry that almost no-one pays that interest rate.
Behind the scenes, the bank and its brokers offer just about everybody a discount off the variable rate. The size of your discount depends upon factors such as how big your loan is, your LVR (loan-to-value ratio), and your negotiating abilities.
So, what are the REAL rates being charged to borrowers?
Here’s the difference between the average rates advertised by major banks, and the REAL rate that some borrowers actually pay for three common loan types, according to Reserve Bank data^ published in August 2017:
|LOAN TYPE||AVERAGE BANK ADVERTISED RATE||AVERAGE REAL RATE||AVERAGE DISCOUNT|
|Owner-occupier, variable, P&I||5.2% p.a.||4.4% p.a.||80 basis points|
|Investor, variable, P&I||5.8% p.a.||4.8% p.a.||100 basis points|
|Owner-occupier, variable, interest-only||5.8% p.a.||4.6% p.a.||120 basis points|
If you’re paying more than the average REAL rate above for your loan type, or getting a lower-than-average discount, it might be time to ask your lender to ‘please explain’.
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