What to Consider Before Refinancing

June 1, 2018


There are a few things you should know before refinancing. Let’s face it. Switching to a new mortgage – just like buying a house in the first place – is a big decision. You have to be sure that it will save you money in the long run and that you’ll get approval before you make the leap. You’ll also need to weigh up whether or not refinancing is the right option for you based on your own personal and financial circumstances.

Here’s an in-depth look at the factors you should consider before you refinance your loan.

What Will You Gain Financially from Refinancing?

Here’s the thing. When you lock in a home loan for 25 to 30 years, it can feel like a jail term for life, where if you manage it well, you may get out on good behaviour.

Also, interest rate rises and the long-term commitment to a monthly repayment can be gruelling, especially if you rushed into making the deal and it turns out to be not as good as you first thought.

A rushed decision when you took out your loan can then see you paying more than you should for your home. It can put you under financial strain and make it harder for you to meet your other important financial goals like saving for retirement and living debt free.

However, the good news is you can reduce your sentence and possibly get out before the term of your home loan ends. To do this, you’ll need to shop around and compare lenders and products. If you can refinance to a home loan with a lower rate, flexible, cost-saving features like an offset account and free early repayments, you can get way ahead of your mortgage and get out of debt years earlier than you originally expected to.

In order to know what you could gain, compare the cost saving to the costs of refinancing. You can use a refinancing calculator to get an estimate of what you could potentially save.

You also want to take a good look at the fees and charges you’ll pay to switch loans.

Look at the costs of exiting your current home loan and the fees associated with applying for your new loan. Then you’ll need to weigh up whether it’s financially viable for you to say goodbye to your existing loan and hello to a new loan.

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Are There Other Benefits You Should Be Taking Advantage Of?

Before you refinance, consider your overall financial picture. What are your short and long-term goals? Are there ways refinancing can help you achieve them?

Here are a few ways you can benefit from refinancing, beyond saving money with a lower rate:

  • Consolidate high-interest debts
  • Invest in a home renovation project
  • Purchase an investment property
  • Give you financial breathing room if you are struggling with your budget

If you have any of these goals, consider whether refinancing can help you and whether you should do it now or hold off. For example, if you want to invest in property in two or three years, maybe wait to refinance then so you can take advantage of all the equity you’ve built up in your current loan instead of paying the costs of refinancing now and in a couple of years.

Thinking about selling in five years when the kids grow up? Including the costs of a home renovation project into your new home loan now could help you increase the value of your property, making it easier to sell later.

Should You Use a Mortgage Broker?

Another factor is your process. If you just went into your local bank and applied for a mortgage last time, you may want to seek out more guidance this time around. Now you know what features you want and what benefits you want out of your loan – a mortgage broker can help connect you with a product that’s right for you.

You can also talk to a mortgage specialist for some invaluable insight before comparing lenders on your own and applying.

What to Do Before You Refinance

Don’t just leap straight into taking out a new home loan. Instead, critically analyse your present home loan. To do this, grab your home loan contract, read through the terms and conditions, look at your interest rate type, fees and charges, and your home loan features. Jot these down.

Next, jump online and go to your internet banking. Click on your home loan account details, and find your current interest rate. Jot this down next to your other home loan details.

Then it’s time to compare your home loan to others on the market. Look at home loans that have similar features to yours and then compare interest rates. Make sure you look at the comparison rate, as this gives you an accurate indication of the home loan costs.

To make any real savings, you want to find a home loan that is at least 1% lower than your existing rate. A 1% reduction on a $300,000 loan could save you close to $3,000 in the first year, which makes switching home loans a viable choice.

Don’t forget, you may be able to refinance with your current lender and get a great deal. A lot of Australians don’t realise they can negotiate their home loan with the lender they have now – in fact, 41% of Australian borrowers never even try to get a more competitive deal.

When you know exactly what you want and have researched what’s available, you are in a strong position to negotiate for your dream loan, or at least something very close. Keep in mind, your bank doesn’t want to lose you as a customer.

Lastly, consider the following:

  • Loan flexibility – can you leave your loan early if you want to refinance again? Will you be able to pay it down early?
  • All fees associated with the loan – don’t end up increasing the cost of your loan with overlooked fees.
  • Customer support and service – can you get the help you need from your lender?
  • Home loan terms and conditions – read the fine print so you know about any restrictions.
  • Rate rise security – how vulnerable will your loan be to rate rises and when will that happen?

If you feel that everything is better than you currently have or you tick the majority of the boxes on your want’ list, then it may be a great time to refinance. Calculate which loan is the better option from your comparison research, check your credit file for any surprises, get your financial documents ready and go transform your financial life with a new loan.

Written by Refinancing.com.au

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