Home loan health check: is your loan still right, and what to check first

What is a home loan health check?

A home loan health check is a review of the loan you already have: the rate you pay, the fees, the structure and what you owe against your home's value, measured against what the same loan could cost you today. It ends in one of three answers: stay, ask your lender for a better rate, or move.

It isn't a rate quote and it isn't an application. It's the same arithmetic Money Brain does before any refinance, run on your loan first, so you know whether there's anything worth doing before anyone asks you for paperwork.

Am I paying too much on my mortgage?

You're paying too much on your mortgage if a new customer would pay less than you for the same loan, at your loan size and your share of the home's value. That's the test. It isn't about whether your rate feels high; it's about the gap between your rate and the rate you could get today.

There are two comparisons to make. First, your rate against what your own lender advertises to new customers. Second, your rate against what other lenders offer someone in your position. The first tells you whether you have a reason to ask. The second tells you how hard to push.

What rate are you actually on?

The rate you're actually on is the one printed on your latest statement, and it can differ from the rate on your loan contract. If you started with a discount for a set period, or a fixed rate that has since ended, your loan may have moved to a higher rate without anything arriving to tell you. That's one of the quietest ways a good loan drifts.

Look for the rate on the loan, not the comparison rate. A comparison rate bundles in fees and answers a different question. If your loan is split, each split has its own rate, so check each one.

The loyalty gap, and how to measure yours

The loyalty gap is the difference between the rate you pay and the rate your lender offers a new customer on the same loan. A lender can offer a new customer a lower rate than the one on a loan it already holds, so the gap can open slowly while nothing seems to change.

You can measure your own. Find your lender's advertised rate for your loan type, at your loan size and your loan's share of the home's value, and set it against the rate on your statement. If a new customer would pay less, you have a reason to ask for a better rate, and a number to ask with.

What a rate gap costs you, in dollars

A rate gap costs more than most people expect, because it runs every month for the life of the loan. Here's an illustration, not a client file: $500,000 owing with 25 years left, at 6.5% a year, and what each step lower would be worth [1].

What this means for you: a half-point gap looks small on a statement. On this loan it's about $155 a month, about $2,500 of interest in the first year, and about $46,400 over the 25 years if it's never fixed. That's why the loyalty gap is the first number a health check finds.

How much is my mortgage costing me?

Your mortgage is costing you the interest your lender charges, plus any fees, and your statement shows both. Look for the interest charged over the year, and the fees charged over the year, as separate lines.

To see the cost from here, take what you owe and the years you have left. On the illustration above, $500,000 at 6.5% over 25 years, the first year's interest is about $32,300, and the interest still to pay over the loan is about $512,800 [1]. At 6.0% it would be about $466,500. Seeing the whole number is what makes the gap real.

Is your offset or redraw working for you?

An offset or redraw works for you only when money is sitting in it. Money held in an offset account is taken off the balance before interest is charged. On the $500,000 illustration at 6.5%, $20,000 held in offset for a year saves about $1,340 of interest [1].

Over a whole loan it adds up. On a $600,000 loan at 6.0% over 30 years, $30,000 held in offset the whole time pays the loan off about 3 years sooner, with about $131,600 less interest. $200 a month on top of the repayment pays it off almost 4 years sooner, with about $106,700 less interest [1]. Some fixed-rate loans limit extra repayments, so check yours before you plan on it.

If the home might become a rental one day, how you hold spare money matters for tax. The ATO's ruling on redraw treats money redrawn from a loan as a new borrowing, judged by what it's used for [5]. Whether that matters for you is your accountant's call, and it's worth asking before you choose between offset and redraw.

Is your loan structure still right?

Your loan structure is still right if it matches what you need from the loan today, not when it settled. A fixed rate suited you when you wanted certainty. Interest only suited a season of lower repayments. A split, part fixed and part variable, suited wanting a bit of both.

If your income, your plans or your family have changed, the loan may no longer match. Planning to sell, to pay the loan down fast, or to keep this home and buy another are three different loans. See interest only or principal and interest for how the two repayment types compare.

Is a fixed rate or interest-only period ending?

A fixed rate or interest-only period ending is one of the best times to check your loan, because the loan changes on its own that day. A fixed rate rolls onto the lender's variable rate for that loan, which may not be its sharpest. Check the date on your contract, and ask what the loan becomes after it.

Interest only ending moves the repayment the most. The whole loan then has to be repaid over the years left. On a $600,000 loan at 6.0% with 25 years left after five years of interest only, the repayment goes from $3,000 to about $3,866 a month [1]. Extending interest only is a new application: the lender assesses you again, at its rules on the day, and may say no.

What this means for you: the months before a fixed rate or interest-only period ends are the cheapest time to check. There's no break cost once a fixed rate has ended, and you can line up the next loan before the change lands.

Has your LVR moved?

Your LVR, the loan as a share of your home's value, moves every time you pay the loan down or your home's value changes. Lenders price by it, so a lower LVR can put you in a cheaper band than the one you started in.

The line that matters most is 80%. Owing 80% or less of the value usually means a new lender wouldn't charge lenders mortgage insurance (LMI), insurance the lender takes out and you pay for [2]. Above 80%, moving can mean paying it on the new loan. Here's what that can come to, from one lender's published rate card, at its standard rates [2]:

These are illustrations from one card, not quotes. LMI varies a lot from lender to lender. The point is the size: an LMI bill can wipe out years of a lower rate, so a health check works out your LVR before anything else.

Has your equity grown enough to use?

Your equity, the value of your home less what you owe, may have grown enough to use. A higher value and a smaller loan both lift it. Equity can lower your rate band, and it can also be borrowed against for a renovation, another property or to clear other debts, if your income supports it.

Borrowing against it is a separate decision from the health check, with its own rules. See using equity to buy an investment property and debt consolidation. One worked number to keep in mind: a $30,000 car loan at 9% over 5 years costs about $7,400 in interest. Rolled into a home loan at 6% with 22 years left, the same $30,000 costs about $24,100, unless you pay it off faster [1].

Bought with the 5% Deposit Scheme? Check this first

If you bought with the 5% Deposit Scheme, a health check starts with the scheme's own rules, because moving the wrong way loses the government guarantee. Rate changes and product switches with your own lender are fine [4].

You can refinance to another participating lender and keep the guarantee, but you can't increase the loan or extend the term. Move to a lender that isn't on the scheme's panel and the guarantee is lost. The loan also can't be increased while the guarantee is in place [4].

The guarantee ends on its own once you owe 80% of the value on your scheduled repayments. Extra repayments you can redraw don't count toward getting there [4].

What this means for you: for a scheme borrower, asking your own lender for a better rate carries the least risk, and the 80% date is worth knowing, because after it the scheme's limits no longer apply.

Has your life changed since the loan settled?

Your life changing since the loan settled matters, because a new lender assesses you afresh. It looks at your income, your debts and your living costs today. It assesses credit cards on their limits, not just what you owe on them. And it tests whether you could still make the repayments at least 3 percentage points above the rate it would charge you [3].

APRA, the banking regulator, also limits how much of each bank's new home lending can go to people whose debts are six or more times their income, to 20% [3]. So someone whose income has fallen, or whose debts have grown, may find a new lender would lend less than they owe today.

That doesn't mean you're stuck. Asking your own lender to reprice the loan usually isn't treated as a new loan application. It just means the order matters: check what a new lender would lend before you count on moving. See how much can I borrow.

When should I review my home loan?

You should review your home loan once a year as a habit, and any time something changes: a fixed rate or discount ends, your home's value moves a lot, your income or family changes, or you want to borrow for something new.

An annual home loan review doesn't have to be long. Pull up your statement, find your rate, check it against what your lender offers new customers, and look at the eight checks above. If your loan settled in the last year or so, there may be less to find, unless a fixed rate or discount is about to end.

Is my home loan still competitive?

Your home loan is still competitive if your rate is close to what lenders offer someone with your loan size, your LVR and your type of loan today, and your fees are paying for things you use. Rates are priced by those three things, so compare like with like: a $300,000 loan at 60% isn't priced the same as a $900,000 loan at 85%.

A competitive rate isn't the only test. A loan with the right structure, a working offset and no fees you don't use can beat a slightly lower rate on a loan that doesn't fit. The health check weighs all of it.

Asking your own lender first

Asking your own lender first is often the quickest way to a better rate, because it doesn't need a new application or a valuation. Call your lender, ask for the retention or rate review team, and say something like this:

"I've had a look at my loan. I'm paying [your rate]. You're offering new customers [their rate] on the same loan, and other lenders are offering [the rate you've found]. I'd like to stay, but I'd like my rate reviewed. What can you do?"

Have your loan balance, your home's rough value and the rates you're comparing in front of you. If they say no, ask what they'd need to see. If they say yes, check the new rate on your next statement.

What if your lender won't lower your rate?

If your lender won't lower your rate, you have a clear number to compare: what you pay now against what another lender would charge, less what it costs to move. You've lost a phone call and gained a reason to look further.

Moving is worth it only when the saving, over the time you'll keep the loan, is bigger than the cost of switching. The next parts show how to work that out. For the whole process, see refinancing your home loan.

Is refinancing worth it? Your break-even

Refinancing is worth it when the interest you save passes the cost of moving, before you'd sell or move the loan again. That month is your break-even.

An illustration, not a client file. On $500,000 with 25 years left, moving from 6.5% to 6.0% saves about $2,500 in interest in the first year, around $208 a month [1]. If switching costs $1,000, the saving covers it in about five months. At $3,000, about fourteen months. At $5,000, because of a break cost on a fixed rate, about two years.

What this means for you: the same rate cut can be an easy yes or a clear no, depending only on what it costs to get. Try your own numbers in the refinance calculator.

The term trap: when a lower rate costs more

A lower rate can still cost you more if the new loan starts a fresh 30 years. Here's an illustration on $500,000 owing with 22 years left, at 6.5%, and a new lender offering 6.0% [1]:

Keeping your remaining term saves about $39,400 in interest. Taking a fresh 30 years lowers the repayment by $567 a month, but adds about $138,000 of interest compared with staying where you are. When you move, ask for the term you have left.

Are refinance cashback offers worth it?

A refinance cashback offer is worth it only if you expect to move the loan again within a few years. An illustration: $3,000 cashback on a $500,000 loan at 6.2%, against 6.0% with no cashback. Over 25 years, the 0.2% difference costs about $1,000 in interest each year, so the cashback is used up after about three years, and every year after that the cheaper rate is ahead [1].

Compare the rate first, and treat cashback as a bonus, not the reason.

What can a home loan health check find?

A home loan health check can find one of three things. Your loan is fine, and you stay. Your loan is fine but the rate isn't, and you ask your lender with a number in hand. Or the gap, the structure or the fees are costing more than moving would, and you move.

Along the way it often turns up smaller fixes that need no new loan: a package fee for features you don't use, an offset sitting empty while savings earn less elsewhere, a fixed rate ending with no plan for what comes next, or an LVR that has quietly crossed into a cheaper band.

Does a home loan review affect my credit score?

A home loan review on its own doesn't affect your credit score, because reading your statement isn't a credit application. Asking your own lender to reprice the loan usually isn't a new loan application either.

Applying for a new loan with another lender is different: it adds an enquiry to your credit file. That's another reason to do the checking first, and apply only when the numbers say moving is worth it.

A broker or your bank for the review?

A broker or your bank can both review your loan, but they answer different questions. Your bank's staff are paid by the bank and can only offer the bank's own loans, so they can tell you whether a better rate is on offer there. A broker compares across lenders, and the law requires a mortgage broker to act in your best interests and put your interests first where there's a conflict [6].

If your bank gives you a sharp rate when you ask, that may be all you need. If it doesn't, or your position isn't standard, a wider comparison is where a broker earns their place.

What a health check with Money Brain involves

A health check with Money Brain starts with your latest loan statement and what's changed since the loan settled. We compare your loan with what's available for someone in your position, work out what switching would save and cost, and give you one of three answers: stay, ask your lender for a better rate, or move.

If the answer is to ask your lender, we'll give you the numbers to ask with. If it's to move, we handle the application and the paperwork through to settlement. Staying put is a real answer, and we'll say so when it is.

What does a broker cost you?

How a broker is paid, and the rule Money Brain holds against it, is set out in full on its own page: what a mortgage broker costs.

Your first move

You've seen the checks. Now there's one question left: is your loan still right for you, at the rate you could get today, once the cost of moving is counted? That depends on your rate, your LVR, your structure and what's changed, and it's what Money Brain works out before anything goes to a lender.

When you're ready, the closing section below is the simplest way to start.