By replacing your current home loan with a new one, you could take advantage of a better deal, but there will be things to keep an eye out for.
Even if you secured a competitive package when you first took out your home loan, it’s worth reviewing the details of your mortgage each year to make sure the interest rates, fees and features continue to meet your needs and match current market rates.
If they don’t, you may be able to secure a lower interest rate, reduce your repayments and pay off your home loan sooner by refinancing.
How does refinancing work?
Refinancing is where you replace your existing home loan with a new one that’s ideally more cost-effective and flexible.
It may involve changing your home loan product with your current provider, but often it will mean switching to a different lender who can offer you a better deal.
If you’re wondering whether many people do it, the Australian Bureau of Statistics revealed that refinancing reached an all-time high in Australia in 2021, with borrowers seeking out lower rates and cashback deals1.
What are some reasons to refinance?
Some of the reasons you may look to refinance include:
1. You want a lower interest rate
If you can find a lower interest rate, you could save money and reduce your repayments. Even a 0.5% reduction could make a big difference over time.
2. You want a shorter loan term
When interest rates are down, you may be able to reduce the term of your loan (from 30 to 25 years for instance), without too much change (if any) to your repayments, by refinancing. Keep in mind, you may be able to do this by staying with your current lender too.
This means you could pay off your home loan quicker than expected.
3. You want access to more home loan features
You may be looking for further cost savings and a broader range of options with the help of added features, such as unlimited additional repayments, a redraw facility (which allows you to access money you’ve paid over your minimum repayments), or an offset account (which could reduce the interest you pay over time).
4. You want more flexibility or security
Converting to a fixed or variable rate, or a combination of the two, could provide you with more choice and assurance.
For instance, a fixed-rate loan has a defined, unchanging interest rate during the fixed-rate term. A variable rate, on the other hand, can go up or down, while a split rate means you could apply a fixed interest rate to part of your loan and a variable rate to the other.
There will be pros and cons with all options worth considering.
5. You want access to your home equity
Borrowing against the equity in your property may be a good idea if you’re looking to invest in property, renovate or fund your children’s education, but there will be things to be aware of.
The most important point is, if you borrow against your property and can’t make the repayments, you could potentially lose your home.
6. You want to consolidate existing debts
If you have multiple debts, such as a personal loan, credit card debt or a car loan, it could make sense to roll these into your home loan if you’re good with your repayments.
This is because interest rates associated with home loans are generally (but not always) lower than other forms of borrowing. Again, there will be potential benefits and things to be aware of.
What do you need to think about when refinancing?
Do you know what you want?
If you’re looking to refinance, do you know what you’re after? It might be a lower interest rate, added features, greater flexibility, better customer service, or all of the above. It’s important to determine these things so when you’re researching other loans, you know exactly what you’re after.
Do the financial benefits outweigh the costs?
You might be able to save money over the long term by refinancing, but it’s important to consider any costs associated with leaving your current plan and changing to a new one.
For this reason, it’s worthwhile investigating where costs may apply, or which fees might be negotiable. Consider discharge fees, registration of mortgage fees and break costs if you have a fixed-rate loan.
Also think about application costs if you swap lenders, which might include establishment fees, legal fees, valuation fees, stamp duty, and lender’s mortgage insurance, depending on how much you’re borrowing.
Have you spoken to your current lender?
Before you jump ship, it’s also worth having a chat with your current lender as they might be willing to renegotiate your package to retain you as a customer. This might also save you paying exit fees if you do choose to stay.
You might also find that any added features you’re looking at with an alternative lender might already be available with your current one.
Has there been any change to your personal situation?
An application process will apply if you decide to refinance and your lender will take into account any changes to your personal situation.
This may include changes to employment, additional debts you’ve taken on, or if you’ve got a growing family, as all these things could affect your ability to make repayments.
Where can you go for more information?
Refinancing can be a good move if it saves you money, helps get your debt under control or provides you with greater flexibility. It’s important to evaluate the pros and cons though, noting these could be complex.
Meanwhile, talk to us today if you need help with your finances.
1 ABS – Refinancing reached all-time high in July (Media release – 2 September 2021)
Source: AMP November 2021
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