Why bother? Is it worth the effort to refinance my home loan?

Recent articles in the media such as this  have referred to the so-called “loyalty tax” or “lazy tax”: the price consumers pay for not comparing their options when taking out car insurance, home insurance, credit cards etc.

This has me thinking – how much is enough to justify moving from one lender to another to refinance a home loan. Obviously the answer to this question is going to differ from person to person, and certainly cost is not the only factor when you’re weighing up the pros and cons of different loan options. But that said, let’s focus on cost for now and ask: how much does the switch to a new loan need to save you for it to be worth your time and effort?

To help answer this, it’s probably a good idea to have a sense of how much time and effort is actually involved in making a switch. If you’re doing your own research and running around, you should probably factor in a couple of days, and probably a fair chunk of this would be spent on researching your options before you can look at making a decision (so you’re spending a reasonable amount of time, regardless of whether you actually switch across or not).

Alternatively, if you use a mortgage broker, you’ll be committing to about an hour of your time to talk the broker through your circumstances and exactly what it is you’re looking for, and then if you decide you do want to switch loans, about another 2 or 3 hours getting your supporting documents together and signing contracts.

So assuming you make use of the services of a mortgage broker, let’s figure you’re committing to about half a work-day of time and effort to switch across to a different loan.

So back to the key question – how much is 4 hours of your time, half a day, worth?

Having a look from a salary perspective, let’s say your annual income is $100,000. Taking into account public holidays and annual leave, a working year is about 46 weeks or 230 days, so that works out to be $435 for each day you work. How many days’ worth of interest savings would you need, in order to make switching loans seem appealing?

If we’re talking about a loan for your own home, chances are the interest repayments aren’t tax deductible and you’re paying off the loan using after-tax dollars. Say your average tax rate is 25% – that brings your daily take-home pay down to $326 each day. If switching loans could save you $1,600 per year, that’s essentially the equivalent of an extra week’s worth of pay. Is that worth half a day’s time and effort?

As the saying goes, ‘a penny saved is a penny earned’, and switching loans in the current low interest rate environment could potentially save you $’000s. A mortgage broker should be able to provide you with comparison figures to show the potential savings over the short and longer term, taking into account any switching costs you would incur.

Of course, there are other factors you should also consider:

• There is certainly a lot of personal information required in submitting a loan application, and you might find the level of detail being asked for a bit
• You might have had a particularly good or bad experience with your current lender, which could mean you’re more or less inclined to move regardless of what interest rates are available
• Cost is only one aspect of a loan. Additional features such as offset accounts, online access and customer service can also be very important

If you’d like to have a chat and see what options are available, I encourage you to call or email me for an obligation-free discussion.

Noah Cohen is a Mortgage Broker with Origin Finance, Credit Representative (CRN 490277) of BLSSA Pty Ltd (Australian Credit Licence 391237)