December 15, 2017
If you have been paying down your mortgage for a few years, you’re likely wondering – should I refinance my home? Typically, mortgage holders refinance every three to five years to get a better deal on their home loan or to save money in the short-term with lower repayments. With a lot of Australians up against a high amount of debt right now, refinancing can be an even more useful strategy to help manage personal finances. It can be used to consolidate other debts, ideally helping borrowers save money on interest and simplify their bills. Others consider switching their mortgage to help make life’s major purchases – higher education, a home renovation, a big investment – more affordable.
Despite the flexibility that comes with refinancing, it’s not always the most cost-effective option. Here’s the deal. If you want to make a wise financial choice, you need to look out for the potential pitfalls just as much as you strategise to take advantage of the potential benefits. A mortgage is always a massive financial undertaking. That’s just the nature of the beast. So, you want to take your time to thoroughly evaluate the decisions you make about your home loan.
Here are the possible refinancing dangers and hiccups you should know about before you make the effort to refinance to a new home loan.
Depending on the characteristics of your current mortgage, refinancing can be incredibly expensive. If you are attempting to exit a fixed rate loan early, watch out for associated break fees, which can be quite high. Be sure to ask your lender exactly how they are calculated so you understand how much they’ll cost.
Outside of break costs for fixed loans, the other fees generally total between $1,000 and $2,000, as long as you aren’t paying lender’s mortgage insurance (LMI). Banks haven’t been allowed to charge exit fees on loans originated after mid-2011; as long as you have a fairly young loan, you’ll avoid these costs. To avoid the pitfall of a surprisingly expensive refinance, double check all the fees you’ll have to pay your current and new lender and ensure the benefits outweigh the costs.
This is a common refinancing danger for borrowers who switch to a fixed rate loan. Especially when interest rates are low, refinancing to a fixed mortgage so you can enjoy predictable payments is appealing. If rates go up, you’ll still be paying down your loan at your lower fixed rate.
However, this security often comes at a hidden cost – you may lose flexibility. For example, you may not be able to make early repayments or save on interest with an offset account as fixed mortgages often don’t have these features.
A lot of people leave the decisions of refinancing their home loan or not and who to refinance with up to the input of their mortgage broker. While a broker can offer invaluable insights and match you with an appropriate loan product, keep in mind, there are a lot of options out there.
Do your own research as well through comparison websites and by investigating the historical rate changes, reviews and features of different lenders. When you do your own research as well, you will have a better idea if their suggestions are ideal for you.
A lot of people assume they need to find a new lender to refinance. Here’s the good news. You can talk to your current lender first and potentially save a lot of hassle and money on your refinance. If rates have gone down and you are ready to change loans, it’s worth it to sit down with your bank and find out what kind of deal they would be willing to offer you.
You might be wondering, should I refinance when lenders are offering rebates? Think about it. With a rebate of $1,000, you could cover a sizable chunk of the refinancing costs, making it more cost-effective to switch to that new loan you have your eye on.
This can be a smart move in some cases. When the home loan market becomes competitive for banks, you’ll see more promotional offers, like refinancing rebates and low introductory rates. Still, you want to tread carefully even with these upfront savings. If a lender tends to raise rates quickly, or has an expensive fee schedule, that seemingly great deal could quickly turn into a refinancing nightmare.
Refinancing, when done at the right time, can put you on the fast road to financial security. However, you don’t want to step into the process blindly. Make sure you know all the nuances of your current and potential new lender, from fees to the consequences of the features you may lose or gain. The better informed you are, the more control you have over your money.
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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