29/06/2018

Refinancing your home loan can seem like an easy way to save money, but it’s not the solution for every homeowner. While it’s true that refinancing can lower your repayments and reduce your loan term, there are a few things you can do to get more value out of a refinance.

Here are some refinancing tips to help you answer the question of whether or not you should refinance your home loan.

7 Tips for Refinancing Your Home Loan

1. Know why you want to refinance

Having a desired outcome for a refinance will help you determine whether or not it’s a good idea. It can sharpen your focus when you’re shopping around and comparing loans. There are lots of reasons why people refinance their mortgage; here are just a few.

  • Change lenders: If you’re not happy with your lender, that’s a strong reason to consider a refinance.
  • Get a more competitive interest rate: Do you have an interest rate above 4 percent? It’s probably time to look at other options. However, keep in mind that a lower interest rate does not automatically mean a good deal.
  • Access more home loan features: Over time, your financial needs change and your home loan might not be keeping up. Changing home loans can give you access to a wider range of features like offset accounts or redraw facilities.
  • Draw on your home’s equity: Maybe you’ve paid down a significant portion of your loan or the home has increased in value. Refinancing can free up funds you can use for things like long-awaited renovations, purchasing another property, or upgrading your car.
  • Debt consolidation: Juggling a number of debts can get complicated. Rolling other debts into your home loan can simplify your finances.
  • Change your loan term: You may wish to lengthen the term of your loan. This move could lower your repayments in the short term, but is likely to cost you more over time.

2. Compare loans early

Refinancing a home loan isn’t a spur-of-the-moment decision. If you’re looking to move at the end of your current loan, start shopping around two to three months before its expiry date. If you don’t have a deadline, give yourself time to get your head around the options. It can take around a month to process the new loan application and make the switch.

3. Ask your current lender for a discount

Happy with your lender but not so happy with the rate they’re giving you? Tell them you’re looking at other options and ask for a better deal. If you’re a reliable customer it’s in their interest to keep you on board, which might translate to a reduction in your rate.

4. Get your financial ducks in a row

Put your best foot forward when talking to new lenders about a refinance. That means paying your bills on time, getting your paperwork in order, cancelling credit cards you don’t need, and reducing your current debts as much as possible. This presents a positive picture to your new lender, who may be more inclined to offer you a better home loan.

5. Do the math on your home loan fees

When it comes to home loans, fees are nearly impossible to avoid, whether you’re leaving an old lender or starting fresh with a new one. Before you make decisions, add up any fees that might apply for leaving your current loan and starting a new one. These may include:

  • Discharge fee: Paid to your current lender for the work of paying out your existing loan
  • Application fee: Paid to your new lender for processing your application
  • Ongoing fees: Regular fees charged by your new lender over the life of your loan
  • Stamp duty fees: State tax on mortgage transactions
  • Valuation fees: Paid to your new lender for conducting a property valuation to determine equity

Once you’ve worked out the fees involved with refinancing, compare the total to how much you’ll save over the life of the loan. If the savings are greater than the penalties, refinancing could still be a good option.

6. Read the fine print on your new loan

Lenders often advertise rates that seem too good to be true. When calculating the potential savings from a refinance, check to see if there are any terms and conditions on the advertised rate. Some lenders may present an appealing low rate, but it may only apply for a limited time. Once the promotional rate expires, your loan could revert to a higher rate.

7. You’d better shop around

When refinancing, don’t go with the first lender to catch your eye! Switching lenders is an opportunity to improve not only your interest rate, but the service you receive and the features of your loan. Compare home loans and narrow down your choices to a few standouts before making your final decision.

So, Should You Refinance or Not?

Each homeowner has a unique financial situation, so there’s no definitive answer to the question. However, there are certain situations where refinancing is worth considering and situations where it might not be a good idea.

5 reasons to consider a refinance:

  • You want to lower your interest rate
  • Your finances have changed
  • You want to use your home’s equity for a financial investment like renovations
  • You want to change loan types
  • You’re unhappy with your current lender

5 reasons not to consider a refinance:

  • You’re planning to sell the property in the near future
  • The associated fees for leaving your current home loan negate any potential savings
  • Your property has decreased in value
  • Your overall debts have increased since you took out your initial loan
  • Your credit history has worsened

You may have specific loan features or finance goals in mind—or perhaps you’re still working out what you want. Speaking to a financial advisor can help define anything you’re unsure about, evaluate your needs and offer options you may not have been aware of.

It’s also a good idea to compare loans every couple of years, just to make sure you’re still happy with the one you’ve got.

Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.