Making an informed decision about change
If you’re thinking about changing your loan to match where you are in life, it’s really worth exploring more than one appealing option.
While a standard home loan term can last 30 years, you shouldn’t feel like you're stuck with that particular loan. There’s a lot that can happen in the space of a few years – let alone 30. You might want to move. You might need a bigger (or smaller) house along the way. Our lives change, and your home loan can change with you.
It’s always a good idea to make sure your home loan suits the stage of life you’re at. It may not just be about the house itself – perhaps you want different features attached to your loan.
There are many options out there – but don’t be tempted to sign up to the first good deal you see. If you find a loan that’s mostly suitable, keep looking! You’ll find the right one, and the doing a little research upfront can save a lot of hassle.
Switching interest rate type
Home loans typically have two types of interest rates: fixed and variable. It’s usually quite easy to go from variable to fixed, but unfortunately, going the other way can prove costly.
Paying to end or start a loan
The Federal Government got rid of exit fees from 1 July, 2011—but this is only for contracts signed after this date. If you signed before then, you may pay exit fees for ending your loan early. Check with your lender if you’re unsure.
On the other hand, when you sign up for a new loan – especially if it’s with a new lender – you may have to pay start-up costs, like an application fee. This information is always available beforehand, so make sure you ask.
Another, sometimes expensive, cost involved in switching a loan is economic cost.
Having a fixed-rate home loan means you’ve agreed to an exact interest rate for a certain period. If you end your loan before this period ends, your lender may charge you economic cost—an estimate of their loss resulting from the change. Since your lender suffers loss when you break a loan term, it’s a cost you need to pay, so get a quote before doing anything (if you have a fixed-rate loan).
Choosing a loan term
If you have a loan where you can choose the term, it’s important to do your sums first. The shorter the loan term, the less interest you’ll pay—but your repayments will be higher. If you choose a longer term (say, 30 years) your repayments will be less but you’ll pay more interest.
Belinda and Pete
Belinda and Pete want to move from their one-bedroom inner-city apartment to a three-bedroom house in the suburbs. They don’t just want more space, they’re going to need it when bub arrives.
Together, they earn $120,000. Their monthly expenses are around $3,000. If they borrow $700k over 30 years at a rate of 5.88% pa, their monthly repayments will be $4,143. But if they halved their loan term to 15 years, they’d pay $5,862.
So, they pay more in the short term, but they won’t pay anywhere near as much as they would in the long run. These are things to consider while you’re looking for a new loan.
Try your own calculations with our loan repayments calculator.
Interest only repayments
Australian Securities and Investments Commission has some useful information for customers interested in using an interest only repayment period as part of their loan term. Check out their MoneySmart, opens in new window guidance for some easy to follow infographics highlighting the pitfalls and benefits of this type of lending structure. You can also find examples of how much you may expect to pay for this type of loan structure.
We have a more detailed explanation and case study to help demonstrate the differences in our article interest only vs. principal and interest repayments.
Doing it for the benefits
In addition to your loan, you might be thinking about getting a new credit card or an offset account attached to your loan. Think about how a travel company will put together an all-inclusive holiday package – most lenders can put together a cost-effective package to include all your banking products to make managing them even easier.
Check with your lender (new or current) about the packages they offer, and how easy it is to move your existing loan to one. It might be easier just switching to a new loan plus package deal.
There are other benefits that may encourage you to switch, like being able to redraw funds or a loan that lets you take a repayment holiday. Don’t forget to always weigh up these new benefits with the cost and effort involved in switching to a new loan.
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The information contained in this article is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, NAB recommends that you consider whether it is appropriate for your circumstances. NAB recommends that you seek independent legal, financial and taxation advice before acting on any information in this article.