Switching Home Loans in this current climate

With low Home Loan interest rate at the level that it is, I am observing increasing number of people trying to get out of their current fixed rate that they had locked in over a year ago.

It is easy to see why consumers may be quick to conclude that they can save on interest charges when they see the difference between their fixed rate (eg: 7.5%) and the current interest rate (eg: 5%). Furthermore, banking and non-banking institutions alike are advertising their products and services the way all clever advertisements are designed to do - which is to attract consumers to use their products. Nothing wrong with such marketing strategies such as honeymoon rates, no ongoing fees and credit cards with no annual fees...for consumers who read every fine print and pay attention to the smallest detail.

It is a good idea for consumers considering such offers to find a mortgage broker or discuss with your existing broker about the cost of switching home loans. In the early '90s, people with mortgages switched home loans on average every 7 years. Nowadays, it's more likely every 3-4 years. A very plausible explanation of this could be due to the increase in the number of mortgage brokers who were coming out of the banking industry. Consumers with existing mortgages began to hear more often (from broker channels) about the savings they could incur if they switch home loans.

There are a few reasons why people should switch home loans but the most common reason would be to save costs whether it be in monthly repayments, in the shorter term or in the longer term. Some people, particularly investors, may well decide not to switch loans for a given tax advantage even if the costs are higher.

So, the question that every consumer really needs to ask is, will this switch save me money?

Switching home loans is, in most cases, relatively easy but tedious as you will have to do the paperwork all over again. When you switch, you will be up for some costs such as:

* Deferred Establishment Fees,
* Early Penalty Fees,
* Discharge of Mortgage,
* Registration of Mortgage,
* Application Fees,
* Package Fees (of the new loan),
* Valuation Fees,
* Bank Legal Fees,
* Peruse Document Fees (if you have a company or trust).

Some of these costs are bank fees and some are government charges. But regardless, please always ask the question how much will it cost for me to refinance or switch loans. Once you have the numbers, do a quick calculation to see when you will break even after switching. For example, when you switch a $300,000 loan, an indicative break cost could be $10,000 (depending on the bank, loan and other factors). The interest that you will save is 3% per annum. This means that you will break even, and start to save money after the 14th month. The first 14 months will be the time taken to recoup the $10,000 to switch loans.

The decision to switch loans is ultimately yours. Your broker can help equip you with the numbers and the numbers will tell you the story. If the costs are not too high, then it might be a good idea. Otherwise, sticking with your current loan facility is not such a bad idea.

Your broker should provide you with a Broker Contract that will disclose what he/she is paid or the range of commission they will receive when you switch loan.