There has been a lot of movement on interest rates, both up and down in the last 12 months. The RBA has been decreasing the cash rate which has had a positive knock on effect for home loan rates for owner occupiers, and banks have also been increasing interest rates on investment loans – driven by increased government regulation around investment lending. So how do you know if your rate is still competitive? Is now a good time to switch lenders for a better rate?
If you’ve had a loan for a few years, there’s a good chance the rate isn’t the sharpest rate available as loan products and rates do change regularly over time. We regularly conduct reviews for clients to determine if their loan is still appropriate and provide advice of whether the rates can be improved.
There are a number of important factors we take into consideration when reviewing a client’s loan and determining whether they can get a better deal:
Which Loan Product Do You Have and Why?
You need to understand why you have your current loan product, aside from the interest rate. There are different reasons for having a particular loan product with a particular lender and rate is only one aspect of this. So be careful in assuming that the loan product with the lowest rate is the best product for you. Perhaps the loan structure of the loan facility relates to your overall long-term financial strategy. Perhaps there are features of the loan which you utilise for tax purposes. Maybe the bank has credit policies that apply to your particular needs. Don’t assume that all banks are the same when it comes to assessing your application, especially with regards to your income, expenses, property type and location.
Compare Apples with Apples
Any other loan product you review needs to be the same as your current loan product. For example there’s no point comparing investment loans and owner occupied loans, or interest only loans with principal and interest loans, or basic loans with professional packages. To get a true idea of any potential savings, you need to compare like with like.
What’s the Discount?
Your loan product, if on a professional package, will have a discount off the standard variable rate. Lenders often have different standard variable rates, so you need to take into account this base line rate when looking at the final interest rate. One lender may give you a larger discount off their standard variable rate compared with another, but have a higher standard variable rate to begin with. This might leave you with a larger discount but higher rate in comparison to another lender. However, standard variable rates can change over time, so it’s often just as important to look at the size of the discount and not just the end rate.
Weigh up the Pros and Cons
Rates between lenders fluctuate often and you might find you go through the process of refinancing, just to find in 6 months that your old lender is just as competitive. It’s impossible to determine where all the lenders will sit interest rate wise in 6 to 12 months so it’s important to weigh up whether it is worth the effort of doing all the paperwork and changing direct debits etc. and what the size of the savings will be. And the time-frames to refinance can take several months. When a bank offers competitive rates they will attract a huge volume of applications, which slows their processing down. We’ve seen banks go from normally assessing an application in one week, blow up to four weeks, and that’s just the initial assessment before valuations are ordered, additional information required, or loan contracts issued. The smaller lenders often have the largest delays. Refinancing can be a long process so be prepared to wait and have to prepare a lot of paperwork.
Crunch the Numbers
Don’t just focus on the interest rate. You also have to weigh up exit fees from your outgoing lender, government fees and charges, application, legal and potential valuation fees for the new lender and what the actual savings will be.
Also, remember that if you’re on a fixed rate, you’ll need to ‘break’ the fixed rate and will likely incur an ‘economic cost’ which is a fee the bank will charge you for breaking the rate, this cost depends on the fixed rate, the amount of time left on the fixed rate and the size of the loan. This has to be covered by any interest rate savings you’ll make.
If you’d like to know whether you can do better on your current loan or have friends or family who may need advice on theirs, contact me on Alycia@stoneturn.com.au or 02 8256 3109.
