August 22, 2017
Smart property investors know how to manage their debts and get the most out of their mortgage. This means knowing when and how to take advantage of all the benefits of refinancing. If you want to seize those golden opportunities as they emerge – lower rates, accessing your equity to jump on another lucrative investment – or to make it easier to pay down your mortgage faster with the right loan, avoid these common refinancing mistakes.
One of the biggest costs of refinancing is lender’s mortgage insurance, or LMI. With most lenders, as long as you intend to borrow less than 80% of the loan to value ratio, or LVR, you won’t have to pay LMI. Borrow more than 80%, and you’ll be stuck shelling out thousands for LMI. Your LVR is based on the current value. If that number goes down, the amount you can borrow to safely stay below 80% also decreases.
To avoid this mistake, don’t refinance until you’ve built up more than 20% of the equity of your property. If you think you may be close to paying LMI if you refinance because property values have gone down, it may be worth hiring a professional valuer to estimate the value of your property before applying for your new loan. You don’t want to find out right before you sign the papers that you’re asking to borrow 81% LVR – and will have to pay lender’s mortgage insurance.
Some borrowers do refinance to a longer term to lower their monthly repayments. This is a financial move of last resort! It should only be done when you’re struggling to keep up with your repayments and would rather refinance than default. When you stretch out your loan, you’ll end up paying thousands (and thousands) more in interest over the course of your loan.
Savvy investors never refinance for a longer term. Even if you switch to a lower rate, if you refinance to another 30-year loan after having already paid down your first mortgage for a few years, you’re probably just increasing your debt. You’ll save by paying off your loan faster.
The best refinancing deal you’ll find is the one you uncover under piles of research. Compare loans online. Pay attention to the real estate market. Look out for deals and special offers that will help you save on the costs of switching loans.
It’s also wise to get expert advice. From free resources to experienced professionals, it’s worth it to take the time to ensure you’re refinancing to the best loan possible. That extra week of thoroughly weighing your options can save you thousands of dollars.
When you see an ultra-low honeymoon rate being offered, your best bet may be to look away. A lot of investors jump when they see those low short-term rates being advertised because they know their repayments will be much lower – for one or two years. The risk is in dealing with the increase when that introductory period ends, and the real rate kicks in. The increase can be significant, leaving you with a few hundred dollars more to come up with each month for that mortgage repayment.
To avoid this refinancing mistake, don’t focus on the advertised honeymoon rates. Look at the real rate to do your calculations when comparing home loans.
Refinancing can be a valuable tool for paying down your loan faster and even making it easier to invest in other properties. That’s why a lot of investors refinance every few years. However, there’s no point in rushing into a new home loan without really checking out your options and evaluating the market. You could end up going through the hassle of refinancing only to realise you’ll actually lose money in the long-term.
Written by Refinancing.com.au
Refinancing.com.au is an end-to-end service that helps people refinance their home loan. We empower you to search for your home loan, and choose the process that suits you.
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