When was the last time you reviewed your current interest rates?

With interest rates at an all time low, families have the opportunity to save significant amounts of money. But more importantly, low interest rates also can mean paying off your loans sooner by shopping around for the most competitive rate for your personal, investment or commercial properties.

TIP : Many borrowers have multiple loans which presents an opportunity. Reviewing your current interest rates on all your properties will give you leverage when negotiating with potential new lenders.

Lower Repayments 

As a borrower you may want to negotiate a lower interest rate to reduce your repayments because you need more money for other expenses.

Others may be motivated to reduce repayments so they can pay off their loan faster. If you’re in the position to be able to secure a better interest rate on your loan, while continuing to pay off the same amount, you could cut years off your loan.

Even a 0.5% reduction in your interest rate can have a big effect on your minimum repayment amount.

The table below shows the saving that can be made on a relatively modest loan of $350,000. In this example, you see that not only will your repayment go down helping your monthly cash flow, but you can save close to 10% of the interest paid over the life of the loan (approximate savings of $34,575), when compared to staying on the higher loan amount.  Larger loans will see even greater savings.

Length of the loan 

If you’re considering switching your loans to an alternate financial institution, keep in mind some lenders will only refinance with a new 25 or 30 year loan term. This means you could end up with an even  longer loan term than the years left to pay off your current mortgage.

The longer you have a loan, the more you'll pay in interest. If the new lender won’t offer you a term equivalent to what’s left on your existing loan it may not be worth it. At the end of the day, extra years still mean extra repayments.

When entering into negotiations, it’s a good idea to remember to seek out a loan with a similar length to your current one. Because if you were to have say 24 years remaining on your loan and you refinance and take that back up to a 30 year term, the savings on interest each month will likely negate themselves as you have added more years in the mix to pay off the loan.

Current lender vs. new lender

It’s worthwhile having a chat with your current lender to negotiate an improved interest rate on your loans - after all, if you don’t ask, you won’t receive! But keep in mind, most financial institutions save their best offers for new customers.

If you have less than 20% equity, you might also be up for lenders mortgage insurance (LMI) if you switch to a new lender. LMI protects your lender in the event you default on your home loan and there is a 'shortfall. So this fee could end up making the cost of switching much higher. Any new lender you’re considering should be able to tell you upfront if LMI will apply.

Do your homework 

There are thousands of home loans available on the market. When was the last time you checked what else is out there? Your home loan is likely one the biggest investments you’ll make in your life. So if you haven’t looked at your options recently, you may find that compared to your current home loan, you’re missing out on additional benefits and savings. 

These features can also extend beyond just better interest rates, to include: 

• lower fees
• more flexible repayment options
• improved features

But you need to do your homework. Added features may also mean added costs. And these added costs aren’t always obvious. Often in these situations, you find that the additional cost is not worth the benefit it brings.

Wondering how to calculate interest rates so you can compare and save? Using a loan calculator and other borrowing tools is a great way to help you work out the best option for you. 

Switching your loan 

Switching your loan has become a lot easier in recent years. These days, loans can settle in as little as a month. 

While changing borrowers, especially if you are a new customer, will mean more paperwork than staying with your current lender, your new lender should help you make the transition as smooth as possible.

And if that means reducing your repayments, the benefit will far outweigh the inconvenience.

Here are some things you need to consider when switching your loans to another institution:

1. Refinancing Costs

This includes such things as discharge fees from your existing loan and application fees for your new loan. Find out what the costs are and weigh up if switching is worth it.

2. Lending Criteria

Many lenders have tightened up their lending criteria. So don’t assume that because you have a loan with one institution you’ll automatically get it with another. COVID-19 has had an impact on lending criteria, so find out what they are first. The best way to find this out is to chat directly with the lender, or go through a mortgage broker who is up-to-date with what the lending criteria is or a range of lenders.

3. Break Costs

If your existing loan is a fixed loan your lender may charge you a break cost, This break cost will cover if you want to end your fixed-term loan before the end of the contract period. It’s worth finding out if this will apply to you and how much you’ll be up for before making any changes. 

Getting reliable and professional advice, that you can understand, from an expert will go a long way to help you make the right decision for your situation. 

At Kelly+Partners, we have our in-house finance specialist, James Russell, available to assist with all your home and investment loan needs. To speak with James directly, you can contact him at 0414 448 388 or email him at james.russell@kellypartnersfinance.com.au

Otherwise, book a discovery session to discuss how to review your current interest rates on all your properties.