Are you thinking of refinancing your home loan? Maybe you're looking for a better interest rate or you want to unlock some of your property's equity to do some renovating, take a well deserved trip or purchase an investment property.
Before deciding to refinance with a different borrower, it may be a good idea to talk to your current lender first to see if they can offer you a better rate or more flexible terms. The home loan market is quite competitive so most major lenders want to keep their existing customers if they can.
If you are indeed thinking about refinancing your current home loan, here are 5 things you should consider when you talk to your mortgage broker:
1. Will The New Loan Save You Money In The Long Run?
Your new loan may offer a cheaper interest rate and better repayment terms but have you factored in the costs of refinancing? Calculating the savings that you'll make with the new loan is fairly simple but you also need to consider what the costs of refinancing are. These can include:
- Exit fees – you could be liable for a mortgage discharge fee from your current lender of between $150-$500 dollars.
- Break costs – if you have a fixed interest rate loan at the moment you may be liable to pay break costs because you are not fulfilling the term of your loan. This could amount to several thousand dollars.
- New application fee – some lenders will charge you an application fee of several hundred dollars when you apply for a new loan.
- Lenders Mortgage Insurance – if you're going to be borrowing more than 80% of the value of your home, then you may need to take out Lenders Mortgage Insurance (LMI). This is generally added to your loan but needs to be factored into the total cost.
- Mortgage Registration Fee – you will need to pay a mortgage registration fee so the new lender can register their details on your title with the relevant government body.
Make sure you add up all the costs that are applicable for your situation to see if your new loan will provide significant savings when these costs are subtracted. Also make sure that you get a key facts sheet from any prospective new lender so that you're aware, up front, exactly what the terms of the new loan will be.
2. Is It A Good Time To Refinance?
If your current loan is on a fixed rate, it may not be a good time to refinance if that rate is fairly competitive. However, if your mortgage is nearing the completion of the fixed rate period, it may certainly be a good time to shop around for better rates and more flexible terms.
Make sure you know exactly what you'll be paying with your current lender so it's easier to shop around for a better deal. It's certainly a good idea to search for a good mortgage broker who can easily do all the sums for you so that you fully understand whether the new loan will be more beneficial and offer significant savings.
3. Are You Considering Purchasing An Investment Property?
If you want to purchase an investment property, you may want to unlock some of the equity in your current home to make purchasing the investment property easier and more viable.
Your current lender however, may not be willing to release this equity as there may be strict lending requirements. If you decide to refinance with a new lender it may be easier to also get the loan for your investment property.
4. Are You Eligible To Refinance?
Generally you should have less than 80% owing on your existing home loan to be eligible for a refinancing loan. Other things to consider about your eligibility are:
- Every new loan application will be recorded on your credit file as an enquiry so make sure that your credit file looks good and that you can afford to have some additional finance applications added to it. If you have any more than 4 enquiries on your credit file in any 12 month period, it could limit the number of lenders who you would be eligible to refinance with.
- If you're self-employed you may have difficulty providing the necessary income evidence especially if it's nearing the end of the financial year. In this case, you may need to apply for a low doc mortgage and ask for a letter from your accountant which states your projected income for the end of the financial year. This may however, affect the type of loan you are eligible for.
5. Will The New Loan Give You Flexibility That You Want?
When considering any refinancing option you should be quite sure that the new loan will give you the flexibility and additional features that you're looking for apart from saving you on interest rates. These additional features could include:
- Flexible repayment options to allow you to make extra payments without any penalties so that you can pay off the loan faster.
- A repayment holiday where you can take a break from making payments for a short period of time in certain situations such as changing jobs or taking maternity leave.
- An offset account which allows you to link a savings or transaction account to your loan account. This is ideal if you have regular wages going into one of your accounts as the monthly interest on your loan is usually calculated after subtracting the amount of money you have in your offset account from the remainder of your loan balance. This means you could save on interest every single month.
- A redraw facility which allows you to withdraw any extra payments that you may have made in the case of emergencies.
- Flexible rate options which allow you to apportion your entire loan into fixed and variable parts. This option may also include the ability for you to make interest only payments for a short period of time.
- Loan portability which is particularly useful if you envisage moving from your current home into a new home in the near future. This will allow you to switch the loan to your new property.
So before you decide to refinance your current home loan, make sure that you carefully consider your options and talk to a mortgage broker who can easily assist you with any questions or concerns you may have.