April 13, 2018
If you’re not happy with your current home loan, it’s time to look into switching to a new one. When you walk into the refinancing process knowing what to look for and how to navigate your refinanced mortgage, you stand to gain a lot.
Instead of learning from experience, and possibly making expensive mistakes, take a look at these refinancing secrets to help you make smarter decisions about your new loan. Something as simple as avoiding certain fees or applying to refinance at the right time could save you serious money.
A lot of people look at where they are now and how a lower rate or more equity will change their current financial life. It’s easy to think about the here and now without giving any consideration to the future.
Here’s the thing. When you refinance, you want to have a clear plan laid out. How will the new loan impact your finances now, two years from now, five years, even a decade from now?
Here are some questions to answer to help you make better refinancing decisions.
How many more years do you plan to live in the same property? If you plan on moving in a couple of years, you’d be better off not refinancing as you’ll have to take out a new mortgage when you move.
What big expenses will impact your finances in the next five to 10 years? A renovation, education costs for the kids, a new car? Will you need to refinance at a certain point to help with those financial goals?
It’s no secret that it costs money to refinance. But what a lot of people don’t understand is how much it can cost. There will be application fees, a property valuation, and other expenses to consider. To weigh-up whether or not refinancing is financially viable you need to add these costs up. Estimate how much it will cost you and then decide how long it will take to break even with your new loan by the money you save on lower repayments.
Here’s a secret to successful refinancing that a lot of people don’t think about – you need to be realistic about your job security and financial cushioning should you find yourself temporarily without work down the line. Unemployment currently sits between 5% – 6%. While the Australian economy is holding fast, it’s not the rock that it once was so you need to think about home loan affordability if you lose your job or you have to take a wage cut if your hours decline.
For example, if you want to refinance so you can renovate your home – which means you’ll increase the term of your mortgage or the amount of your loan when you switch to a new one – make sure you will be very comfortable making your home loan payments under your new terms.
If you’ve done a long-term financial planning assessment, you know how much you’re going to spend if you refinance now, and you have a high level of job security, you’re in a good position to start looking at your refinancing options. Here are the steps you can take to get yourself started.
When you refinance, you need to have your finances in good order. If you have debts, such as a credit card and personal loans, then pay these off before you apply for refinancing.
You should also consider reducing your credit card limit. Credit limits can reduce your borrowing power, especially if you’re a higher risk. The general rule of thumb is that every $1,000 of credit will reduce your borrowing power by $4,000. If you also have a history of paying bills late, then you may find it harder to switch loans or lenders. Ideally, you’ll have two years of zero late payments before you apply.
Here’s a refinancing secret a lot of borrowers don’t know – you can save money if you refinance with your current lender. You don’t need to switch to a new bank to get a new, better loan.
If you’re happy with your current lender’s level of service, discuss your financial needs with your existing lender before you look at other options. With the lending market being so competitive, your current lender may be able to offer you a better home loan deal than you currently have.
If you’re looking to consolidate debt, buy an investment property or use the equity in your home to renovate or go on holidays, then refinancing is an ideal choice. However, before you make the switch, do independent research. Be sure to search and compare rates to find a loan that suits you.
Keep in mind, when you use your new mortgage to access your built-up equity, you’ll likely switch to a different type of loan. For example, if you have a variable rate home loan now, you may want a line of credit mortgage or maybe even a construction loan if you are planning a large renovation project or you are investing in a new build. Make sure when you compare rates, you look at the interest rates and fees on the specific type of loan you plan on refinancing to.
When you research the market, look at interest rate comparisons that give you the most accurate indication of real costs. Also, work out what home loan features you’ll use. For example, do you want your new loan to have no-fee early repayments and redraw, or a 100% offset account?
Jot down the names of loans, lenders and features that you feel are a good fit. Once you have a clear idea of your ‘perfect’ mortgage, approach your existing lender and also a mortgage broker. See what both have to offer you, then make a decision based on your findings.
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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