Refinancing your home loan

Refinancing your home loan

As a consumer, you are spoiled for choice when it comes to home loans. For financial institutions to stay competitive, new products are being updated constantly, which means you, as the borrower, have the power to access lower fees, better interest rates or the best features for your circumstances.

Reasons to refinance

Borrowers generally refinance their home loan when they find a lower interest rate available. Lower rates mean you will not be charged as much interest, so you’ll be able to save money and even pay off your mortgage sooner. 

There are more factors to take into account than just price when weighing up your mortgage options. Special features to suit your individual needs can be just as important to consider. There are added features available to help you make the most of your finances while providing added flexibility. 

  • Offset account. An offset account works like an everyday bank account in the sense that you can contribute and withdraw money in a transactional capacity. It is linked to your mortgage so that any amount in the account is directly offsetting the amount of interest charged on your mortgage. For example, a mortgage of $300,000 with $50,000 in an offset account will only be charged interest on $250,000 – the $50,000 reduces the principal amount so no interest is charged on that portion, while still being available to spend as needed. 
  • Redraw facility. This works very similarly to an offset account except they’re generally not a transaction account. You can make extra repayments and redraw the funds when you wish.
  • A very valid reason to refinance is to gain the ability to make extra repayments. Contributing above the minimum repayments could see you save years and thousands of dollars on your mortgage.
  • Bundling financial products such as credit cards, savings accounts and your home loan can mean saving money on paying fees on individual accounts.

The refinancing process

  • Know the cost of your home loan. This can easily be discovered by checking your statement or online banking account. Have a look at your interest rate and any extra fees you’re paying on your mortgage.
  • Check with your loan provider if they can swap you to a better deal. Refinancing can be costly in the way of exit fees and time-consuming ensuring your house is ready to be valued by another loan provider. It’s not uncommon for a bank to offer you a discount if they get the sense that you’ll be looking elsewhere. It’s less costly for them to offer a discount than lose you as a customer. 
  • Compare home loan products. You’ll want to consider factors such as interest rates, fees, and special features to suit your needs – such as listed above.
  • Weigh up the cost of moving. You’ll possibly need to pay an exit fee to your current provider and may face application fees (plus others) with your new provider. Many providers offer promotions where they’ll waive fees so it pays to look around. Once you’re aware of the fees, you’ll be in a good position to determine how much you’re going to save by refinancing. 
  • Apply for your new home loan. This process is as simple as going into a branch and asking to apply for a mortgage or even submitting an online application. You will need to provide personal and financial information.
  • Close your old home loan. Your new loan provider will communicate with your old provider to get the loan swapped over and settled so you shouldn’t have to lift a finger.

And that’s it! Refinancing takes a little bit of research and some paperwork but it’s well worth the effort and could save you a huge amount of money.

How Often Should You Refinance Your Home Loan?

How Often Should You Refinance Your Home Loan?

With most home loans spanning 25-30 years, it would be such a huge commitment to see out the duration of your original mortgage. The good thing is you have the freedom to refinance to a cheaper or more flexible product whenever you like.

There are no set rules for how often you should shop around for a new home loan, but a good rule of thumb is at least every 2 years. With so many options available on the market, the interest rates and fees are very competitive, so why not take advantage and save some cash in the process? 

The main reasons for refinancing are to save money by paying a lower interest rate, to reduce the length of the mortgage and to access features such as an offset account or redraw facility but there are additional factors to consider before jumping into refinancing:

  • Be wary of the length of the new loan. You’ve found the perfect home loan with a lower interest rate and more features than your current loan, so what’s the catch? Some lenders will only offer to refinance with a new loan of a 25 or 30-year term. This is all well and good if your current remaining term is close to 25-30 years, but if you have less than 20 years left to go, refinancing with a longer term isn’t going to be the greatest option. A longer term means more interest payments, resulting in a higher cost. Negotiate a term similar to what you currently have remaining.
  • If you have less than 20% equity in your home, you’ll probably need to pay lender’s mortgage insurance (LMI). LMI is a non-refundable, one-time premium paid at the settlement of your mortgage and is not transferrable, so it will need to be paid again on any new loan if equity is less than 20%. If you avoided LMI on your mortgage and your home equity happens to drop below 20%, then staying with your current lender will likely be the best option as LMI can cost thousands of dollars. Equity can drop due to factors such as the condition of your home, your neighbourhood desirability and market trends. 
  • Is your current rate fixed or variable? If your interest rate is currently fixed, it may not be worth refinancing until the fixed term ends. Breaking a fixed term often attracts fees that will outweigh the financial benefits of refinancing.

It’s a great idea to shop around for a better home loan, but always do your research when looking to refinance to ensure that changing lenders is a financially viable option for your circumstances.

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