May 6, 2020
There’s never been a more competitive time to refinance- interest rates are at an all time low, house prices are declining and the property market is rapidly changing which means there might be a better deal out there for you. But while all signs may be pointing towards refinancing, there are red flags you should be looking out for when making the decision to refinance your home loan.
Refinancing when it’s not appropriate for you could create long term financial damage and could increase any mortgage stress you’re currently experiencing. If you want to make sure you don’t make any rash decisions that you’ll regret, take a look at these six common mistakes to avoid when refinancing.
If you see a deal that you think is good, it’s best to take the opportunity rather than to wait around for something lower – you don’t want to regret about missed opportunities in the future. Make sure to also not refinance if there’s no appropriate reason. Ensure that you have a long time plan in mind and that the new deal will help you reach your goals.
A handy tip that will help you to devise this plan is to use a loan comparison tool to forecast how much savings you’ll be making. eChoice’s home loan rate comparison tool can help do the math for you, access it here .
What you see is not always what you get. The scenario where the interest rate you’re given by your chosen lender is different to what you see is one that is all too common. That’s why it’s important that you have a look at comparison rates. These comparison rates take into account fees and charges, and will give you a better idea of the cost of the home loan.
Be sure to also shop around and compare. While it’s easy to feel the obligation to remain loyal to your current lender and use products that you’re familiar with, you should also look at the deals other lenders are offering. This is a tactic that Reserve Bank of Australia (RBA) governor Phillip Lowe recently advised every home owner should consider doing. You can read more about why he feels lender loyalty doesn’t pay off here.
The day you finally pay off your mortgage is a day that all home owner’s dream of- so why make that dream less achievable by adding years to your loan? Prolonging the life of your loan will mean that you’ll have to pay more interest in the end. So not only will it take longer to achieve your goals, but you’ll be paying more out of pocket. The only situation where this would be favourable would be if you’re experiencing financial hardship and need to make smaller repayments, otherwise adding years to your loan is a no-go.
Be sure to refinance when you’re in a financially able to. You’ll want to be sure you’re able to make your loan repayments and stay on track when it comes to paying off your loan. Ensure you also know how much your property is worth. If your property has decreased in value, it could mean that you will struggle to get your equity levels up to 20% of the property value and as a result, you may have to end up paying Lender’s Mortgage Insurance (LMI) for a second time. A good way to check whether your loan to value ratio is at a good level for refinancing is to consider a property valuation.
It’s also important that you’re also aware of the pros and cons involved when refinancing to and from fixed and variable rate loans.
Fixed Rate Loans
Refinancing when you have a fixed rate loan can actually do you a little bit of damage. This is because when you have a fixed rate home loan, your interest rate will be locked in for a period of typically one to five years. When opting out of a fixed rate loan, you may have to pay discharge fees or an early termination fees. These exit fees can be harsh at times as lenders always want to maximise their profit margins- so be sure to be aware of the terms and conditions of the loan you’re opting out of
Similarly, if you want to refinance to a fixed rate loan, you should make sure to check whether you have a rate lock option on your loan. That way you’ll be able to lock in the rate of the loan at the time of the loan. This prevents your lender from adjusting the rate of your loan during the settlement period. You might have to pay a fee for this rate lock’ feature but some lenders may offer it to you for free which is also a plus.
That variable loan with a super low interest rate may look appealing to you now, but don’t be fooled by these honey moon’ rates. It’s common for lenders to advertise low rates and charge these rates to you for the first few years. However after a few years you may find that the rates aren’t as beneficial as they initially seemed. So if you’re switching to a variable rate, ensure that you have an idea of the rates you’ll be paying once this honeymoon period is over.
The mistake many homeowners make when refinancing, is that they naively focus too much on the interest rates rather than other aspects, such as the range of additional fees that they could be incurring. Some of the fees you could be charged include:
- Mortgage discharge fees
- New application fees
- Stamp duty
- Lenders Mortgage Insurance
- Setup fees
- Title Insurance
- Discharge fees.
Refinancing is already a large up-front investment, as may be dealing with two lenders who each charge their own fees. Familiarising yourself with all the different kinds of fees and features that they offer will ensure that you’ll be making all the right decisions.
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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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