November 30, 2017
As more homeowners realise the benefits of refinancing and take the time to educate themselves on how to save on their mortgage, refinancing has become more of the norm in Australia. Still, there are just as many myths floating around as there are facts. Misconceptions can deter you from making decisions or taking actions that could otherwise improve your financial situation.
Here are the refinancing myths to be aware of. The better educated you are on the refinancing process and what it entails, the better equipped you are to make your home loan work for you now, and in the future.
This is the biggest misconception that stops homeowners from looking into refinancing. Yes, there are some costs involved. However, they may not be nearly as much as you assume.
Refinancing costs include:
- Loan application fees for the new loan.
- Valuation fees so your home can be properly inspected, and the current value can be assessed.
- Exit fees, only if your current loan originated before 1 July 2011. From this date on, exit fees have been banned.
- Settlement fees to cover the closing out costs.
- Lender’s mortgage insurance if you refinance for more than 80% of the value of your home.
Keep in mind, all of these fees are not always applicable. For example, some lenders will waive the application fee in order to attract new customers. Newer loans don’t have any exit fees.
Typically, the largest expense will be lender’s mortgage insurance, that unwelcome lump sum you may have paid when you first took out your loan. As long as you are borrowing less than 80% of the loan to value ratio – the amount you borrow divided by the current value of your home – you won’t pay LMI again.
Instead of assuming refinancing costs too much, figure out how much the fees will cost for the loan products you are looking at, as well as any fees you’ll have to pay your current lender. Then, compare this to the amount you’ll save by refinancing. Doing this will give you a clearer idea of how costly, or surprisingly affordable, refinancing may be.
As lenders want you to refinance with them in order to get your business, you’ll find that many banks are willing to streamline the process for you. For example, some lenders will set it up so your current repayments automatically deduct to cover your new home loan payments. That way you don’t have to open a new account.
Also, all the emotional stress of getting approved for a mortgage won’t be there. You’ll be in a much better position as you’ll have built up equity, and you already are living in your new home rather than having to look at what you want from the outside. This creates a more straightforward, black and white experience, especially if you work with a broker to help clarify your options even further.
Explore your choices. Weigh the costs and benefits. Apply to your top pick and then start paying down your new loan, often with little difference to the way you are making repayments now. Except, your repayments will be smaller.
You don’t have to switch to a new lender to get a new loan. You may be able to stick with your current lender but change to a better loan. Consider talking to your current lender. If you have a good relationship with them, see if they will offer you a lower rate. They may also be willing to match a better loan on the market that you are considering in order to keep your business.
This isn’t always true either. When you refinance, you are essentially applying for a new loan. Usually, you’ll be in a better position simply because of your built-up equity. However, it’s possible for the value of your home to go down, especially if you originally purchased it when property prices were particularly high. Or, there could be new problems, such as a leaky roof or a termite problem that will decrease its value. This means you may have less equity than you think.
Also, if your credit has changed, or if your income has just gone up or down because you switched jobs or decided to start your own business, you may have trouble getting approved for a competitive loan. You may want to refinance to consolidate the new vehicle loan you just took out and your credit card debt, only to find out you won’t qualify for the best rates because you credit score is lower than when you first took out your home loan.
To play it safe, talk to a mortgage broker or another financial professional. They can help you assess your eligibility and guide you on how to qualify for the best loan refinance for your needs.
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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