A Guide to Refinancing Your Mortgage
Many homeowners consider refinancing their current home loan, but it’s not an easy decision to make. Logically, homeowners know that just because they see a better interest rate it doesn’t necessarily mean they’ll save money by changing lenders. However, the truth is that if you do it at the right time and in the right way, you could end up saving a lot of money.
Are You a Dissatisfied Home Loan Customer?
Are you looking for a better home loan rate or seeking better customer service? If the answer to either of these questions is yes, then you’re certainly not alone. Most people with home loans would love a better deal, but the worry is that, while another home loan might look like a good idea at first glance, we know that refinancing is not a simple matter and must be carefully considered before moving forward.
Refinancing is an option for borrowers who have been negatively affected by rate hikes, but the process is not as easy as it once was.
Refinancing your home loan makes perfect sense in the following situations –
- You need additional money to pay for a child’s education costs, home renovations, or to invest in another property;
- Your current lender’s rate is not competitive with other lenders in the market;
- A major change has occurred in your financial situation;
- You’ve decided to change your home loan to a fixed interest rate;
- You’ve decided to consolidate all your debts into your home loan.
Refinancing your home loan may not be a great idea if –
- You’re not planning to own the property for much longer;
- Pre-payment penalties on your existing home loan are high;
- Your income over the period of the home loan is uncertain (perhaps you’re a freelancer);
- The balance of your home loan is low and you’re not planning on redrawing the available equity;
- Your credit history has taken a dive due to outstanding debts; meaning you probably won’t be offered a good rate.
Before making the final decision to refinance your home loan, consider your circumstances over the next three years. What is your goal? Is it a lower interest rate, flexibility, debt consolidation, or lower fees?
Chasing a lower interest rate simply isn’t enough: you need to think about the entire life of the loan. You also need to consider the costs involved when changing from one lender to another. Borrowers need to be aware of the following when considering refinancing their home loan –
- The impact of fees applicable, such as entry and exit fees, application fees, valuation fees, stamp duty and legal fees, and any other ongoing charges;
- The term of the home loan, because this can impact long-term financial obligations;
- Will you be choosing a variable or fixed interest rate?
- How secure is your income? Will you be able to manage the home loan on one wage, instead of two?
Borrowers should be cautious if they notice warning signs that refinancing their home loan with a particular lender might not be a good idea. If you’re not happy with the service you’re receiving from your potential lender, it’s time to look elsewhere. If the lender lacks communication skills during this important period of trying to win your business, or if they’re slow in approving your loan, you can be fairly sure that their service won’t improve once they’ve actually won your business.
If you’re considering refinancing with another lender, take the time to speak with your existing lender. You may be surprised! Some lenders will go to extreme lengths to keep your business, such as waiving certain fees and charges; particularly if you’ve been a good customer and made all your payments on time, and you’ve already been with that lender for a number of years.
Prior to approaching a new lender, make sure you’ll be presenting the very best financial picture of yourself to them. Pay out any unnecessary credit cards and reduce your other debts as much as possible. If you have a large credit card debt or you’re consistently late in paying your bills, you may struggle to find a lender who’ll be prepared to offer you a good rate.
When Refinancing Does Make Sense
There are many reasons why people decide to refinance their home loan, such as –
- Their current lender’s loan rate is now higher than their competitors;
- Perhaps there’s been a career change which has influenced their financial situation;
- Maybe the homeowner is planning on purchasing more real estate; or
- Quite often homeowners will refinance because they’ve decided to renovate their existing home.
There may not be any specific reason for choosing to refinance. It’s certainly worth looking at the issue of refinancing from time to time because there could well be a much better deal out there for you. Loan products are continuously changing and improving, so weighing up the pros and cons of refinancing is smart business. Our suggestion is that every three-year period homeowners should assess their loan and compare it to other products in the market. This timeframe will allow you to manage your interest rate risk and you’ll be able to determine if perhaps changing lenders might provide you with a new flexibility, or even lower fees and charges.
If a portion of your home loan, or even all of your loan, is locked in for a three-year period, our suggestion is that you start researching a few months prior to the expiry of your contract. In addition, you’ll be minimising the ‘get out’ fee charged by most lenders if you complete the three-year period.
Seeking a Lower Interest Rate
Hoping for a lower interest rate, and therefore lower repayments, is probably the most common reason why people decide to refinance their home loan. It’s very frustrating for borrowers when they discover that their lender has increased the interest rate on their loan to a figure that’s higher than recommended by the Reserve Bank of Australia; especially when other lenders either pass on the set increase, or even less. As you know, any slight increase, or decrease, in your interest rate can make a huge difference to the overall amount of money you pay over the long term.
On the other hand, there are other borrowers who refinance simply because they want to fix their repayment, generally because they believe rates have bottomed out – or they’re close to doing so.
Consolidating debt is another reason why some homeowners choose to refinance their home loan: this results in just one monthly repayment instead of paying off multiple debts. If you’ve been struggling with debt from various sources, such as credit card debt, a personal loan, and/or other high-interest loans, then it can make sense to roll all these debts in together with your home loan. The obvious advantage of doing this is that your home loan rate is typically a lower interest rate than other debts: particularly when we know that the interest rate on some credit cards can be as high as 20% – or even more! The trick with consolidating all your debts is to ensure you don’t make a lower repayment once you’ve consolidated. This also applies if you’re successful in getting a lower interest rate on your variable home loan: these savings should be used to pay off your home loan quicker- not used as spending cash.
Accessing the Equity in Your Home
Some borrowers choose to refinance in order to access the equity in their home: perhaps they’re considering renovating their existing home, purchasing an investment property, or maybe they’re planning on taking that holiday they’ve dreamed of. Whilst accessing the equity in your home will allow you to expand your property portfolio or increase the value of your existing property, it’s important to remember that the term of your loan will be greatly increased.
If you do make the decision to refinance, make sure that you’re in a home you plan on staying in for a long-ish period of time. If you move house shortly after refinancing, you won’t be able to take advantage of the cost savings.
When Refinancing Makes No Sense at All!
Obviously, there are situations where refinancing should be avoided. For example, if you have a good relationship with your lender and you’re chasing lower interest rates, talk to your lender first. You’ll find that, if you’ve been a good customer and never missed any repayments, they’ll do everything in their power to retain your business. You only get what you pay for, and changing lenders to win a small rate reduction could well mean that your new lender takes no interest in new or your loan and you receive no customer service at all.
Another factor to consider is how long you’ve been paying off your home loan. Let’s say you’ve been paying off your home loan for 20 years: if you refinance your home loan for a longer term loan you’ll be reducing your repayments in the short term, but it may end up costing you many more years – which means you’ll be paying more money long-term.
You also need to calculate the penalties for pre-payment on some home loans; meaning that you need to weigh the cost of any penalties on your existing home loan against any savings you might make. It’s important to remember that refinancing is not right for everyone: if you’re on a comparatively low-interest rate there may be no benefit to you from refinancing. In fact, you need to be careful because you could end up incurring more costs when taking into account exit fees and other administration charges.
If you already have a low balance on your home loan and you’re not planning on redrawing the equity in your home, then refinancing is generally not very beneficial. Work out the breakeven point: this is the amount of savings on the interest rate required to make up for any penalty fees and charges. This figure could well make the difference when determining whether to refinance – or not.
Taking Tax Considerations into Account
Borrowers with an investment property who are contemplating refinancing should consider how their taxes will play into the equation. If the loan for your investment property was not borrowed against that specific property, then you can’t claim any deductions for expenses incurred while the investment property is being rented out. So, in order to maximise your deductions, it’s imperative that you seek advice from your tax professional. Of course it goes without saying that you must always operate under the rules of the Australian Taxation Office.
So, do lots of research, shop around and crunch the numbers: the whole idea of refinancing is to ensure that it makes financial sense in the long term.
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