Should you negotiate a better rate or switch lenders?

If you think your home loan isn't competitive anymore, you generally have a few options. You can ask your current lender for a better rate, refinance to another loan with the same lender, or switch to a different lender offering a more competitive deal.

There isn't one option that's right for everyone. Staying with your current lender can save you time, hassle and some of the costs involved in switching. You may also be able to keep the features you're already using.

But if another lender can offer you a significantly better deal, the potential savings may make switching worthwhile.

The important thing is to compare your options based on your own circumstances. Don't pay more simply because you're loyal to your lender, or because switching feels like too much work.

Before you negotiate with your lender or start looking at other lenders, find out how your current loan compares with what's available.

Don't just look for the lowest advertised rate. The right comparison is with loans that are similar to yours and that you could realistically qualify for.

Look at loans with similar:

• loan type and purpose
• loan to value ratio (LVR)
• repayment type
• features
• loan term

Your current rate may look high compared with the lowest rate on the market, but that doesn't necessarily mean you can get that rate yourself.

Your LVR and financial circumstances can affect the rates and loans available to you.

The interest rate is important, but it isn't the only thing that determines whether a loan is a good deal.

Consider the features you actually use, such as an offset account or redraw, as well as:

• ongoing and annual fees
• additional repayment options
• fixed or variable rates
• repayment flexibility
• the remaining loan term

A loan with a slightly higher rate may still work out better if it gives you features that save you money or are important to how you manage your mortgage. But there is little point paying a higher rate or fee for a feature you rarely use.

Your loan may also be worth reviewing if your circumstances have changed since you first took it out.

For example, your property value may have increased and your loan balance may have fallen, reducing your LVR. This could improve your position when comparing other loans.

On the other hand, a change in income, employment, debts or household expenses could make it harder to qualify with another lender, even if you can see better rates advertised.

Your need for particular loan features may have changed, too. You may now have enough savings for an offset to be valuable, or you may be paying for features you no longer use.

Before deciding whether to negotiate or switch, make sure you know where you stand.

Once you know your loan isn't as competitive as it could be, your first step doesn't necessarily have to be refinancing. Ask your current lender what they can do to improve your rate.

If they can offer you a competitive deal, you may be able to save money without the time, paperwork and costs involved in switching.

There are some practical advantages to staying with your current lender.

You may avoid some of the costs involved in refinancing, keep the features of your existing loan and avoid going through a new loan application.

It can also be less hassle. If your lender is willing to give you a competitive rate, you may get most of the benefit of refinancing without actually changing lenders.

But don't stay simply because negotiating is easier. Compare the offer with what you could get elsewhere.

It helps to go into the conversation knowing what comparable loans are offering.

Your position may also be stronger if you have:

• a good repayment history
• a lower LVR than when you first took out the loan
• a substantial loan balance
• built up equity in your property
• been a long-standing customer

None of these guarantees that your lender will reduce your rate. They simply give you useful points to raise when asking for a better deal.

You don't need to threaten to leave or negotiate aggressively.

You could say:

“I've reviewed my home loan and found comparable loans with lower rates. I'd prefer to stay with you, but I'd like to know what you can do to make my rate more competitive. Can you review my loan and see whether you can offer me a better rate?”

If your lender makes an offer, ask for the details in writing and check whether anything else changes, such as your fees, loan features or loan term.

Don't focus only on whether your lender has reduced your rate.

Compare the new rate with the overall benefit of switching elsewhere.

For example, if your lender offers to reduce your rate from 6.14% to 5.84%, but another suitable loan is available at 5.64%, the question isn't simply whether 5.84% is a good rate.

You need to work out whether the extra saving from switching is enough to justify the costs, effort and any features you would give up.

If your lender's offer is good enough, staying may be the simplest option. If it isn't, it's time to work out whether refinancing would actually leave you better off.

If your lender can't offer a competitive enough rate, don't assume that switching will automatically save you money. Work out what the refinance will cost and how much you could actually save.

Start with the basics:

• your current loan balance
• your current interest rate
• the new interest rate
• the time remaining on your loan

A lower rate can make a meaningful difference, particularly when you have a large balance and many years left on the loan.

But don't just compare the two rates. Work out your savings over a realistic period.

Refinancing can involve several costs, depending on your existing loan and the new lender.

These may include:

• discharge fees
• application or establishment fees
• valuation fees
• government or registration costs
• fixed-rate break costs
• LMI, if applicable

Check the actual costs rather than assuming refinancing is free.

A refinance that saves $3,000 a year doesn't look quite as attractive if it costs $2,500 to make the switch.

Cashback can reduce the upfront cost of refinancing, but it shouldn't be the reason you choose a particular loan.

Check the eligibility requirements and any conditions attached to the offer. Then compare the underlying interest rate, fees and features with your current loan.

A larger cashback today may not compensate for a higher rate over the years that follow.

Once you know your net switching costs and expected savings, work out how long it will take to recover the cost of refinancing.

A simple calculation is:

Net switching costs ÷ monthly saving = approximate break-even period

For example, if refinancing costs you $2,000 after cashback and other incentives, and saves you $200 a month, your approximate break-even point is 10 months.

After that point, the ongoing interest saving starts to outweigh the cost of switching.

This is only a starting point. Your actual savings will change as your loan balance falls and your interest rate changes.

The break-even point only matters if you expect to keep the new loan long enough to reach it.

If you're planning to sell the property or pay off the mortgage soon, a refinance that takes several years to recover its switching costs may not make sense.

On the other hand, if you expect to keep the loan for many years, a refinance that saves you money after a relatively short break-even period may be worth considering.

A lower monthly repayment doesn't necessarily mean you've found a cheaper loan.

If you refinance and extend the loan term, you may reduce your repayments but pay interest for longer.

Where possible, compare loans over the same remaining term so you're comparing like with like.

If you deliberately extend the term to reduce your repayments, that's a separate decision. It may make sense if reducing your monthly cash-flow pressure is your priority, but understand the potential impact on the total interest you pay.

The question isn't simply “How much will my repayments fall?” It's “How much better off will I be after all the costs over the period I expect to keep the loan?”

Finding a better rate is only part of the equation. You also need to be eligible for the new loan.

Your circumstances today may be very different from when you first took out your mortgage, and a lender will assess your application based on your current financial position.

Your loan-to-value ratio or LVR is the amount you owe on your home compared with its current value.

LVR = loan balance ÷ property value × 100

For example, if you owe $600,000 and your property is worth $750,000, your LVR is 80%.

Your LVR may have fallen because you've paid down your mortgage, your property has increased in value, or both.

A lower LVR can potentially give you access to more competitive loan options and may also reduce or avoid LMI when refinancing, depending on the circumstances.

So if you haven't reviewed your home loan for a while, it's worth checking what your property is worth today rather than relying on the value from when you bought it.

A lower rate advertised by another lender doesn't mean you'll necessarily qualify for it.

The lender will look at your current circumstances, including your income, expenses, debts and employment situation.

If your financial position has worsened since you took out your existing mortgage, you may find that refinancing is harder even if you have a good repayment history.

This is one reason why the rate you can see isn't always the rate you can get.

You may find yourself in what is commonly called mortgage prison, where you can see better rates elsewhere but can't refinance because you no longer meet another lender's lending criteria.

This can happen if your income has fallen, your expenses or debts have increased, or your borrowing capacity has changed for another reason. It can also happen because of the lender's serviceability assessment. Lenders generally need to assess whether you could still afford the loan if interest rates were significantly higher than the rate you're applying for.

This means you may be comfortably managing your existing mortgage but still fail another lender's serviceability test. Your current lender may also be more willing to retain you because it already has your repayment history.

In that situation, you may need to stay with your current lender, even if another lender is offering a better rate. Your options may include negotiating a better rate or looking at whether another loan from your existing lender is a better fit.

You don't have to wait until you're ready to refinance before checking whether your mortgage is still working for you. A regular review can help you spot an opportunity before it becomes a problem.

Your home loan shouldn't be set and forget.

At least once a year, check your interest rate, fees and features against what's available in the market. You may find that your loan is still competitive, or that it's time to ask your lender for a better deal.

When interest rates move, don't assume your home loan has automatically kept pace with the market.

You don't necessarily need to review your loan after every RBA decision. But significant changes in interest rates or competition between lenders are a good reason to check where your loan stands.

A change in your financial circumstances can change what you need from your home loan.

For example, you may:

• earn more or less than when you took out the loan
• have taken on new debts
• have higher or lower household expenses
• have accumulated more savings
• need an offset or other feature you didn't previously need

Your circumstances can affect both the type of loan that suits you and whether you can refinance.

As you pay down your mortgage or your property increases in value, your LVR may fall.

That can put you in a different position when you compare home loans, so it's worth checking whether your improved equity gives you access to better options.

Don't wait until your fixed-rate period expires to start looking at your options.

Start reviewing your loan before the fixed period ends so you have time to compare your lender's new rate with other options and understand any costs involved in switching.

If you've been making your repayments and haven't changed your mortgage for several years, that's another good reason to check it.

The loan may still be suitable, but the market, your circumstances and the products available to you may have changed since you took it out.

You don't have to remember to do all of these checks yourself.

Connect your home loan to Bheja for a Health Check and see where it stands today. Bheja can then monitor your loan over time, so you can be alerted when there may be a reason to take another look.

The idea isn't to refinance every time something changes. It's to know when your mortgage needs your attention.

There isn't a single answer. The right move depends on your current loan, what your lender is willing to offer and whether switching would leave you better off after all the costs and any other trade-offs.

The important thing is to compare the options available to you rather than assuming you need to switch.

And don't judge the decision on the interest rate alone. The best outcome could be a better rate from your existing lender, a different loan with that lender, or a completely new lender.

The right question isn't “Which lender has the lowest rate?” It's “Which option leaves me better off?”