The big switch

With home loan interest rates at a 12-year high, many thousands of homebuyers must be thinking about trying to switch to a lower-interest loan. Potential switchers would include those reaching the end of fixed-rate loan periods and having to face the harsh reality of prevailing rates.

But do your homework before switching home loans. There are plenty of traps and you could end up paying even more than now.

A great starting point for anyone thinking about switching mortgages is to look up the websites of interest-rate and lending product researchers Cannex and InfoChoice. For no charge, you can examine the real or comparative rates that build all of a loan's charges into the interest rate. This tells you what your mortgage really costs and how it stacks up against others on the market. See  http://www.cannex.com.au
http://www.infochoice.com.au/Home/Banking/HomeLoans/tabid/56/Default.aspx

Also take a close read of the mortgage switching checklist from the Australian Securities & Investments Commission (ASIC). See http://www.fido.gov.au/fido/fido.nsf/byheadline/Home+loan+switching+checklist?openDocument

After you compare your existing mortgage's real or comparative interest rate with competitive mortgages, ASIC suggests considering what features you really want from your home loan. The bottom-line is that the more features, the more a loan is likely to cost.

As Smart Investing™ has written before, most basic mortgages have facilities for borrowers to redraw extra repayments if the money is unexpectedly needed, and that's probably the only feature most borrowers need. In other words, it can make much sense to go for a no-frills mortgage.

Next in ASIC's switching checklist comes the true cost of switching. Check what a switch will really cost.

The total cost of switching can be breathtakingly high. As the checklist states: "You will need to decide whether the reduction in interest rate with a new loan outweighs the costs of switching from your existing one. The lower the exit and start-up fees [for a new loan], the more you stand to gain by switching."

Take particular care when weighing up the cost of switching. There are some real potential pitfalls here for poorly informed borrowers.

A final step in ASIC's switching checklist is to talk to your existing lender. I think this is a particularly smart tip. It could be much simpler and perhaps much cheaper by negotiating a better deal from your current lender. For one thing, you would not have to go through the hassles of applying for a new loan.

ASIC points out "Your current lender may be able to suggest an alternative loan for you at a cheaper rate or offer to reduce the interest rate in order to keep your business."