Reflect, review before you refinance

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Reflect, review before you refinance
Jospephs Gate

If you are thinking of leaving your current lender for greener pastures, here are some points to ponder before you make your decision

Do you sometimes feel your current home loan no longer meets all your lending needs? This may be the right time to look at refinancing.

Refinancing is when you switch your home loan, either to a new lender or with your existing lender. It’s often done to get a home loan with lower interest rates or fees, or when circumstances change, for example when renovating a home.

But before you begin, here are a few more questions you need to ask yourself…

A lower interest rate beckons…

This is one of the most common reasons why Australians refinance their mortgages, but before you take the decision, calculate all of the fees and charges which will be associated with your new loan, and compare interest rates.

If you’re switching to a lower rate but will pay a large fee to do so, in addition to continuous annual fees, think again if the switch is worth what you’re paying. It may be smarter to just call your existing bank and ask if they can lower the rate.

This is the rule of thumb according to industry experts—if the savings made from refinancing take more than two years to start paying off then refinancing may not be the best choice.

But always compare a range of home loans available for refinancing.

Renovating and refinancing

Refinancing to renovate is another popular reason why borrowers choose to move to new lenders. There are a number of loans available for those refinancing for renovations: construction home loans and line of credit home loans. A construction loan is more appropriate for structural renovations, while credit or personal loans are better in times of smaller, cosmetic renovations.

Remember that if your home is valued at more than the amount you owe on your loan you can refinance your loan to access that equity and then draw down on that amount to pay for your renovations.

Consolidate debts with refinancing

Refinancing to consolidate debt may involve adding a car loan, credit card loan or personal loan into your mortgage to take advantage of the lower rate typical of a home loan. This kind of refinance requires discipline. If you keep making the same repayments you were previously making, or if extra repayments are made towards the loan then this will work to pay off the debt faster.

Buy, build a new home with a smaller loan

Refinancing your existing loan to a new one with a larger or smaller loan size might be required if you’re looking to buy a new home, depending on costs. If building a home, refinancing to a home loan with a construction option may be a better move as it lets you withdraw funds you need to pay your builder at the different stages of construction, thus saving you money during the time taken to build your new dream home.

Flexibility?

Variable rate loans tend to offer the most flexibility, but increased competition in the market has meant that some lenders are offering more features on fixed rate loans. The downfall with variable rate loans is that if the official cash rate goes up, your interest rate will most likely go up with it.

If you can’t comfortably meet your mortgage repayments anymore you might be able to refinance your loan to extend the term and reduce repayments, or switch to a more basic loan with a lower interest rate.

But rather than refinancing, it might be worthwhile speaking to your lender and explaining to them that you need some extra time to sort out your financial situation. If you’re looking to refinance to a home loan with a lower rate, be aware that exit fees and upfront costs might reduce some of the savings, so ensure you can cover these costs.

Refinancing risks
  • A lower interest rate alone does not always mean the mortgage will be cheaper than the loan you already have. Some loans are promoted on the basis of a lower interest rate but when you look closely at the fine print you may find that the fees and charges will more than make up for the lower interest rate. Check the comparison rate, which takes into account more of the fees.
  • Lower interest rates may also mean a loss of flexibility in your home loan. You may lose the ability to make additional payments when you have spare money to invest such as any bonus in wages or tax returns, or lose valuable features such as offset accounts.

 

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