Although the mortgage market is currently very competitive, refinancing your home loan can be a complex process. So, it is important that you understand what is involved and if refinancing is the best option for your personal circumstances. Here are some tips on where to start:
- Ask yourself why you want to refinance. When it comes to refinancing, individual circumstances are more important than just a good mortgage rate. Whether you want to unlock equity, invest in a new property, renovate your home or just get a better deal; you’ll also need to decide whether your goal is to reduce your monthly payments, pay less interest over the length of the loan or simply pay off your loan faster. Taking these factors into account will help you determine which home loan product best suits your needs.
- Do your research. Look around at what deals are available. Make sure you compare the interest rates and the term. There are a number of different home loan products available ranging from basic loans that offer a lower rate of interest without complex features and additional benefits compared to more comprehensive banking packages with slightly higher interest rates but they provide more flexibility in terms of offset and redraw facilities. Alternatively, you can set up an offset account to reduce the interest you are paying on your loan – the larger the offset, the less interest you will pay over the lifetime of the loan. If you want to pay off your loan as fast as possible, look for a home loan with the shortest term with repayments you can afford.
- Speak to your existing financial specialist first. Changing lenders can be far more complex than just switching to a different home loan product with your existing bank, so it always pays to ask if you can get a better deal where you are. Our needs change as we grow older, so life events – like starting a family, moving from an apartment to a house, or downsizing – can mean that a home loan that was suitable a couple of years ago may no longer be the best option for you.
- Examine the real cost of switching. Although you can save money in the long term, there are other factors to consider that may add to the cost of switching. Be careful of introductory offers that charge a low rate for the first one to two years but then roll over to a much higher interest rate. You’ll also need to check your existing contract to ensure that you are not up for discharge fees or break costs on fixed loans. Refinancing may also have an impact on your tax deduction (so do consult your accountant) – for better or worse, make sure you check whether your home loan interest deduction will go up or down.
- Know how your numbers stack up. Lenders will look at factors like how much equity you have in your property, whether property values have gone up or down since you invested, what your debt-to-income ratio is and how good your credit score is. If you have less than 20 percent equity in your property, refinancing might be expensive and you may also need to take out Lender’s Mortgage Insurance (LMI), adding to the overall cost of the loan. You will also need to know what your break-even point is – i.e. the point at which the costs of refinancing have been covered by your monthly saving – and whether you plan to keep the property for long enough to benefit from refinancing.
Making the switchTaking into consideration the points above, it is important that you do a thorough cost-benefit analysis before refinancing. If it is all a bit beyond you, you can ask your bank or a reputable broker to do the legwork for you. Once you have done your homework and decided that the move will be worth it, making the switch is as easy as calling your lender to organize the paperwork.
When’s the right time to refinance a home loan?When considering refinancing a mortgage, there are many questions:
- Should I do it now?
- Do I wait for interest rates to drop?
- Is my interest rate competitive?
- Is the timing right for my needs?
- Will I save money?
- Can I refinance a fixed-rate home loan?
What do you need to watch out for?There are many variables at play when you consider the type of loan (fixed-rate loan or variable loan), interest and comparison rate, offers, and features offered by lenders. Before you even contact a lender, you need to look at what’s involved in closing out your current mortgage, as that’s where you could get unstuck.
- Closing costs that could impact your switch to a new lender:
- Early exit fees (these can be costly if you refinance before a specified period)
- Fixed-rate home loan break costs (if your current fixed period has yet to expire)
- Discharge or settlement fees (approximate range $150 to $700).
Why your current financial situation is important?When you approach a lender or credit provider for a new home loan, they’ll want to assess your ability to repay the loan. That means you’ll need to provide details of your personal and financial situation, proof of income, payslips, and other information to meet their lending criteria.
Know your borrowing powerAs every lender has different criteria, knowing what you could potentially borrow with your latest financial and personal details is essential. At Westpac, our handy home loan calculators can help you estimate how much you could borrow as well as what your monthly repayments might be:
- Borrowing power calculator
- Repayment calculator
- Other calculators
Can I borrow more when I refinance?Your ability to borrow more against your property will depend on three things:
- The current value of your property
- The loan to value ratio (LVR)
- Your ability to make the repayments.
Why would you want to increase your mortgage when refinancing?There are several reasons why you might want to increase or ‘top up’ your mortgage:
- Finance home improvements
- Buy an investment property
- Buy a new car or boat
- Debt consolidation
Can I refinance more than once a year?No rule says you can’t refinance more than once, but it may not be the most practical thing to do, especially if you consider refinancing costs. However, if you have a good reason to do it, or you have no choice and need to sell your property quickly, it can be done. Be particularly careful if your current home loan is on a fixed interest rate as you could be up for break costs as well.
What else should I consider?Before you make any decisions, you need to be clear on why you want to refinance your home loan. The reasons you’re looking for a new mortgage could be addressed with your current loan by using features that you may not be aware of or changing the way you’ve structured your loan. That’s why before you put in a new home loan application, talk to your current lender and request a review. Keeping your lender means you'll avoid costs and fees such as:
- Discharge or settlement fee
- Property valuation fee
- Mortgage registration fee
- Search title fee
- Exit fees or break costs
- Application fees
- Lenders Mortgage Insurance
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