A 30-year contract shouldn’t lock you down. If you’re thinking about changing your loan to match where you are in life, you need to do your homework first. Read on to find out what you need to consider.

A standard home loan term can last 30 years. But even if you’ve signed a long contract, you shouldn’t feel like you're stuck with that particular loan. A lot can happen. Perhaps you need a different-sized house; maybe you’re running out of space or, possibly, your four bedrooms are too much. Who knows? Our lives change – and so your home loan should change with you.

It’s not a bad idea thinking about swapping your home loan to something more suitable to where you are now. And it mightn’t be about the size of your house – perhaps you want different features attached to your loan. Maybe you want a line of credit instead of a traditional loan, or you like the idea of an offset account?

But. Don’t sign up to the first loan you find. We can’t stress enough how important it is to do your homework. If you find a loan that’s mostly suitable, keep looking! You will find the right one. You don’t want to get stung later on for not spending a bit more time exploring your options.

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. The first thing you should check is whether or not your contract was signed before this date. (If so, 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.

Switching interest rate type

Home loans typically have two types of interest rates: fixed and variable. While it’s easier to go from variable to fixed, going the other way can prove costly.

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—this is an estimate of their loss resulting from the change. Because your lender suffers loss when you break a loan term, it is 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 a loan lets you choose its 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

Now married for a few years, Belinda and Pete want to move from their one-bedroom inner-city apartment to a three-bedroom house in the suburbs. They want to expand. Actually, they need to expand. Pitter-patter.

Combined, 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. Yes, 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 the things to consider before choosing a new loan term.

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 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.

Doing it for the benefits

In addition to your loan, perhaps you’ve thought about getting a new credit card or an offset account attached to your loan. In the same way 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. This makes managing all your finances 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 + package deal.

Check out our NAB Choice Package.

Other benefits that may encourage you to switch include 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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