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2020-08-04 Property Tips
Author: Satterley

Thinking of refinancing? Here is what you need to know

If you have had your home loan for some time now, it is more than likely your needs have changed considerably, particularly in today’s current unprecedented times.

Your financial situation might be vastly different to what it was when you started your home loan, or in that period you may have started a family and your financial circumstances have changed. Or there may be new loan features available with newer home loan products that better suit your current needs. 

And in today’s historic record low interest rate climate, refinancing to take advantage of a better interest rate than what you are currently paying, could be the right choice for you.

This is where mortgage refinancing could be the perfect solution and is by far the top reason people choose to refinance.

Refinancing your mortgage is essentially taking out a brand new mortgage.

More often than not, it involves taking out a new loan through a new lender.

Choosing to refinance could be for many reasons. Here are some of the top purposes in our refinancing guide:

Freeing up equity

Changing loans could be a means to use your home’s equity to renovate or extend to better suit your family.

The equity in your home could help you realise that long held dream of buying an investment property or fund a new purchase such as a car.

Refinancing your current loan is a way to free up these funds.

Merging debts

You may want to better manage your finances by consolidating all your debts into one.

Mortgage refinancing can also be an opportune way to get ahead of your debts.

If you are like the average Australian who has credit card debts, a car or personal loans, mortgage refinancing is a good way to merge your debts into one at a much lower interest rate.

Combining all debts into the one loan at a lower interest rate, and paying interest on just one loan instead or multiple debts, could reduce your monthly repayments.

Interest Rates

Perhaps your fixed interest rate term is coming to an end, or you have seen other lenders with a much lower interest rate than what you are currently paying.

Securing a lower interest rate is the top reason many choose to refinance.

Refinancing can also be prompted by the desire for predictably of what your repayments will be each week or month, by securing a fixed interest rate.

This is favoured by mortgage holders who want certainty with their interest rate and what their repayments will be should rates rise in the years to come.

Or you may want to take advantage of a variable rate that allows you to pay more off your loan when you have the funds to do so, in order to repay your home loan faster.

This can save you thousands of dollars over the lifetime of your loan.

Reduced mortgage payments at a lower interest rate will benefit your cost of living and help your budget.

In today’s historic record low interest rate climate, refinancing to take advantage of a better interest rate than what you are currently paying, could be the right choice for you.

Repayment holidays

This feature is also handy if you are planning on starting a family and having a break from the work force. Or it is a useful back up if you find yourself unemployed.

Making extra repayments on your home loan when possible will create a surplus of funds and some lenders will allow you to take a ‘repayment holiday’ and will draw on these funds to permit you to take a break from repayments.

Offset account

Offset accounts are another reason many decide to take the plunge and refinance as they can greatly reduce the interest you pay on your debt.

An offset account works by having a savings or transaction account linked to your home loan.

You can use it for daily expenses and living costs, and have your wage deposited into it. It works just like an everyday transaction account.

An offset account is a handy way to reduce the interest your pay on your loan.

It works whereby you are reducing the interest you pay on your loan as the account’s balance is 100 per cent offset against your loan balance.

So the higher the balance of funds in your offset the less interest you pay, hence you can get ahead on your loan and pay it off sooner.

Typically, an offset account is not an option with a fixed rate and are more commonly available with a variable interest rate.

Incentives

In today’s competitive lending environment, many of the big banks are offering incentives to entice new customers.

Many lenders have various deals where your settlement fees will be paid or offer cashback deals.

Other lenders are offering $2000 to $4000 for making the leap, gift cards or discounts on mortgage lender’s insurance.

Discounted interest rates for a certain time period are also other ways lenders are enticing new clients.

While some lenders will waive bank fees for a certain period – or off the entire life of your loan– others offer discounted home insurance policies.

It is important to speak to a professional when making any financial decisions for you and your family.

But just where do you begin to kick off the process of mortgage refinancing?

There are many things to consider if it is the right move for you. Here’s some words of advice and tips to help you get started:

Compare loans and features

While a cashback deal sounds good, sometimes you have to weigh up whether that and the new interest rate is the best decision for you over the lifetime of your loan.

Consider whether the loan features best suit your circumstances now, and for the years ahead.

It is important to do your research and take your time. Choosing to refinance is a big decision and it pays to examine what features a new loan product has. Read the fine print. 

Speak to your current lender

Before you decide to switch lenders, ask your current lender what rate they could offer you to stay with them. There is no harm in asking and it may save you refinancing fees to stay put.

Weigh up the costs

Choosing to exit your existing home loan and refinancing will involve additional costs in various fees.

Exit fees on loans taken out since July 2011 are forbidden but could be applicable to loans taken out prior.

If you have a fixed rate loan and decide to switch to a new lender before the term’s expiry, there are break costs.

Setting up a new loan involves upfront fees including a valuation fee, a loan application fee and a settlement fee.

Some lenders will require a property valuation on your home before you make the switch.

If the valuation is at a lower figure than you anticipated, lender’s mortgage insurance might be required.

If your loan amount is less than 80 per cent of the new valuation you will avoid the need for mortgage insurance.

If that is not the case, it could be a hefty additional cost to your loan amount.

Risks of consolidating all debts into your new home loan

While having all your debts rolled into one and not having to worry about meeting monthly credit card or car loan repayments sounds appealing, merging all debts into one can have its drawbacks.

By consolidating all debts into the one, you are turning what was a short term loan into a much longer commitment.

For example, you may have five years of repayments left on your credit card debt. Choosing to consolidate it with your new home loan is spreading the debt over thirty years – six times longer.

Ask the experts

While refinancing your home loan can feel overwhelming, it needn’t be that way.

Consider engaging the services of a qualified mortgage broker to help you refinance your home loan.

They can remove the hard work from the process and save you time and stress by doing the research for you.

Some brokers have special deals with certain lenders and can secure you special deals designed for their clients only.

They also can find different home loan options for you and give you a choice of scenarios that suit your personal circumstances.

Satterley is not a financial adviser and this blog is for general information only. You should consider seeking independent legal and financial advice to check how the website information relates to your unique circumstances. Satterley is not liable for any loss caused, whether due to negligence or otherwise arising from the use of, or reliance on, the information provided directly or indirectly, by use of this website.

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