With interest rates at record lows, now could be the time to take advantage of low-interest home loans. While this is great news for house hunters, these low rates also make it the perfect time for those already paying off a mortgage to consider refinancing.
Refinancing is switching home loans to gain better interest rates, or other benefits. While you will need to thoroughly research the potential loans on offer, taking the time to do so now could result in significant savings. Though the process can seem daunting, we’ve put together some things to consider below.
Before you get started
Before you get lost in the rabbit-hole of research, take a moment to think about what you want from a new loan. What are your non-negotiable needs? What would you like, but could live without? What would you like to avoid?
Given job security is an ongoing issue, it’s important to factor potential financial changes into your plans. Starting with a clear understanding of your goals, needs, and challenges will save a lot of time and stress later on, as well as helping to narrow down the list of potential options.
Your current lender cannot stop you refinancing with another lender, but they will often offer incentives to stay, so this is the time to talk to your current lender about your plans to refinance. This can seem scary, even rude, but the worst they can do is not offer you a better deal, freeing you up to go elsewhere.
What you need to know before refinancing
Those with strong credit ratings, and a significant amount of equity in their home, are more likely to be approved. According to savings.com.au credit ratings are a key factor.
This means that if you send out multiple applications at once, it can give the impression that you’ve been rejected, rather than chosen not to work with multiple lenders. Having multiple refinancing applications on your credit report could also impact the interest rate you’re offered. So, it’s better to choose one loan to apply for, rather than a few at once.
There are costs associated with refinancing your home and it’s important to factor these expenses into your plans. According to Canstar, the total cost of refinancing fees can range from $300 to over $1,000.
- Discharge fees: which are administration costs paid to your current lender
- Application fees: for the new loan
- Valuation fees: if you are offering a property as security
- Land registration fees: which remove the existing mortgage and register the new one
- Lenders Mortgage Insurance: which is if you have less than 20% equity in your home
- Break fees: if you have a fixed rate loan and refinance during the fixed rate period
- Ongoing fees: depending on the lender
Once you’ve found a potential loan, it’s recommended you use Money Smart’s Mortgage Switching Calculator to compare it to your current loan.
Do you need a broker?
Though mortgage brokers can be useful, you don’t need one to be able to refinance. A licensed mortgage broker can help navigate the options available and will be responsible for finding the best loan for your specific needs. This can be helpful if you’re overwhelmed by the choices or not confident in navigating the fine print of different loans.
Questions to ask
Whether you’re independently researching or working with a broker, there are some important questions to ask:
- What are all of the ongoing fees for this loan? Are there fees for making additional payments, or paying the loan off early? Fees for missed payments?
- What systems are in place to support customers during COVID-19? What will happen if I cannot work or need to miss a payment?
- What loan features are available?
- What do I need to qualify for this loan?
- How does this loan compare to my current loan? What are the advantages? What are the disadvantages? Remember: there will always be elements that don’t work to your specific needs
- How will this refinance impact my monthly payments?
- If you are refinancing to consolidate loans, what are the long term advantages and disadvantages? Will you be in a stronger financial position?
Mistakes to avoid
The biggest mistakes, as mentioned above, are to send too many applications at once, and to forget to factor in the costs of refinancing. But there are other potential issues you need to be aware of.
While a lot of loans sound great on the surface, when you dig a little deeper, there can be hidden fees, conditions, or elements that mean you’re not getting a better deal. Always read, and understand, the terms of the loan, and pay particular attention to the fine print. If something seems too good to be true, it might well be.
Paying lower monthly fees sounds great, especially during a time of economic insecurity, but will often mean paying more over the course of the loan, as you’ll be paying interest over a longer period of time. This should always be factored into your decision.
Honeymoon rates, on the surface, seem like a fantastic option. It means a low interest rate for a few years, and then back to market standards. However, run the figures on what you’ll pay after the honeymoon ends. Depending on the terms of the loan, you can find yourself paying more than you would have if you’d stayed with your previous mortgage.
Though there is significant research involved, refinancing, especially while interest rates are so low, can see you in a more secure financial position, and able to pay off your mortgage sooner.
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Oiyo is a consolidated online resource, we are not financial advisors. We work with a range of industry professionals and compliance check our articles to ensure factual accuracy. However, we do not provide professional financial advice. Consider seeking independent legal, financial, taxation or other advice to check how the information and ideas presented in this article relate to your unique circumstances.