Should I get financial advice before I refinance?

Should I get financial advice before I refinance?

Refinancing your home loan can seem like a big decision considering a property is often the most expensive purchase Australians make in their life time. For this reason, when big sums of debt are involved, it can seem like a good idea to get as many opinions as possible before making a choice as to whether or not to refinance a loan.

While professional financial advice can provide good guidance in these sorts of situations, for your standard refinancing process on a straight-forward owner-occupier or investment loan, financial advice may not be necessary. It must be stressed, however, that seeking financial advice is a personal choice and if you feel more confident seeking a professional perspective then that is encouraged.

If you are wondering whether your situation may benefit from a professional perspective, read on to see some different scenarios where financial advice may be advisable.

It should be noted that professional advice should be sought from an impartial financial adviser. A broker who receives benefits for directing you to one loan or another may not be the best person to give you an unbiased view of as to whether or not you should refinance and how to best do it.

Pros
  • Can assist you with complex financial problems related to mortgages
  • Can assist with planning if you are experiencing financial hardship
Cons
  • Costs will be involved
  • Will slow down the refinancing process

 

 

 

Situations where you may prefer to consult with a professional financial adviser

a young husband and wife with their baby sit and chat to a woman in their dining room . They are all referring to a laptop in front of them and various paperwork is dotted about the table.

You own multiple properties 

If you have multiple properties, and therefore multiple home loans, and you are considering refinancing one or all of these loans, you may benefit from getting some professional advice as to the best way to go about this process. While not strictly necessary, a financial adviser could provide you with some tips to make sure you are paying your debts off in the most cost-effective and efficient manner.

You are refinancing because you can’t pay your mortgage

If you’ve fallen on to hard times financially and you urgently need to reduce your mortgage costs you may be considering refinancing to a lower rate to do so. If, however, you have already missed a mortgage repayment or are at risk of defaulting on other loans then you may benefit from contacting a financial adviser instead to help you get your immediate situation under control. Refinancing your mortgage may be part of the greater plan but in the near future it is important that you receive assistance to stop yourself sinking into further financial stress.

You are refinancing from an owner-occupier loan to an investment loan or vice versa

If the purpose of your property has changed then the type of loan will need to change along with it. If this is your first time owning an investment property you may want to seek advice on how to switch your loan and the potential tax implications of your new investment.

You have no equity in your existing home loan

If you want to refinance your loan but you have no equity in your property, then it will be much harder to accomplish than your standard home loan switch. You may want to engage a professional adviser to discuss why you want to refinance with no equity and if it will be possible given your personal circumstances.

You are refinancing for debt consolidation

If the reason you want to refinance your home loan is to consolidate existing debt from multiple loans and credit cards, then this can potentially be a good strategy to help you get your debt under control. There are, however, certain rules that should be followed to ensure that you don’t end up paying more in interest than is necessary. While you can read up on this and devise your own plan to pay back your debt, if the reason you got into trouble in the first place is from mismanaging your finances then some personalised financial advice may be in order.

Situations where you most likely will not need to consult a financial adviser

You are refinancing your only home loan to get a better deal

While it is up to you whether you feel more comfortable seeking advice before refinancing, for your standard home loan switch to a loan that offers a lower rate or better features you should be able to navigate the process alone. Taking the time to research the refinancing process and how to find a home loan suited to your needs will help you along the way but personal advice will most likely not be necessary.

You want to switch to a different lender

If you’re unhappy with the level of service offered by your lender and you have a straightforward mortgage situation, then you will probably not require personalised advice before refinancing. All that would be required is for you to compare and find another lender and loan you are happy with to kick start the refinancing process.

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Learn more about home loans

How do I refinance my home loan?

Refinancing your home loan can involve a bit of paperwork but if you are moving on to a lower rate, it can save you thousands of dollars in the long-run. The first step is finding another loan on the market that you think will save you money over time or offer features that your current loan does not have. Once you have selected a couple of loans you are interested in, compare them with your current loan to see if you will save money in the long term on interest rates and fees. Remember to factor in any break fees and set up fees when assessing the cost of switching.

Once you have decided on a new loan it is simply a matter of contacting your existing and future lender to get the new loan set up. Beware that some lenders will revert your loan back to a 25 or 30 year term when you refinance which may mean initial lower repayments but may cost you more in the long run.

Who has the best home loan?

Determining who has the ‘best’ home loan really does depend on your own personal circumstances and requirements. It may be tempting to judge a loan merely on the interest rate but there can be added value in the extras on offer, such as offset and redraw facilities, that aren’t available with all low rate loans.

To determine which loan is the best for you, think about whether you would prefer the consistency of a fixed loan or the flexibility and potential benefits of a variable loan. Then determine which features will be necessary throughout the life of your loan. Thirdly, consider how much you are willing to pay in fees for the loan you want. Once you find the perfect combination of these three elements you are on your way to determining the best loan for you. 

Can I change jobs while I am applying for a home loan?

Whether you’re a new borrower or you’re refinancing your home loan, many lenders require you to be in a permanent job with the same employer for at least 6 months before applying for a home loan. Different lenders have different requirements. 

If your work situation changes for any reason while you’re applying for a mortgage, this could reduce your chances of successfully completing the process. Contacting the lender as soon as you know your employment situation is changing may allow you to work something out. 

How do I take out a low-deposit home loan?

If you want to take out a low-deposit home loan, it might be a good idea to consult a mortgage broker who can give you professional financial advice and organise the mortgage for you.

Another way to take out a low-deposit home loan is to do your own research with a comparison website like RateCity. Once you’ve identified your preferred mortgage, you can apply through RateCity or go direct to the lender.

Will I have to pay lenders' mortgage insurance twice if I refinance?

If your deposit was less than 20 per cent of your property’s value when you took out your original loan, you may have paid lenders’ mortgage insurance (LMI) to cover the lender against the risk that you may default on your repayments. 

If you refinance to a new home loan, but still don’t have enough deposit and/or equity to provide 20 per cent security, you’ll need to pay for the lender’s LMI a second time. This could potentially add thousands or tens of thousands of dollars in upfront costs to your mortgage, so it’s important to consider whether the financial benefits of refinancing may be worth these costs.

What are the responsibilities of a mortgage broker?

Mortgage brokers act as the go-between for borrowers looking for a home loan and the lenders offering the loan. They offer personalised advice to help borrowers choose the right home loan for their needs.

In Australia, mortgage brokers are required by law to carry an Australian Credit License (ACL) if they offer credit assistance services. Which is the legal term for guidance regarding the different kinds of credit offered by lenders, including home loan mortgages. They may not need this license if they are working for an aggregator, for instance, as a franchisee. In both these situations, they need to comply with the regulations laid down by the Australian Securities and Investments Commission (ASIC).

These regulations, which are stipulated by Australian legislation, require mortgage brokers to comply with what are called “responsible lending” and “best interest” obligations. Responsible lending obligations mean brokers have to suggest “suitable” home loans. This means loans that you can easily qualify for,  actually meet your needs, and don’t prove unnecessarily challenging for you.

Starting 1 January 2021, mortgage brokers must comply with best interest obligations in addition to responsible lending obligations. These require mortgage brokers to act in the best interest of their customers and also requires them to prioritise their customers’ interests over their own. For instance, a mortgage broker may not recommend a lender who gives them a commission if that lender’s home loan offer does not benefit that particular customer.

What is equity? How can I use equity in my home loan?

Equity refers to the difference between what your property is worth and how much you owe on it. Essentially, it is the amount you have repaid on your home loan to date, although if your property has gone up in value it can sometimes be a lot more.

You can use the equity in your home loan to finance renovations on your existing property or as a deposit on an investment property. It can also be accessed for other investment opportunities or smaller purchases, such as a car or holiday, using a redraw facility.

Once you are over 65 you can even use the equity in your home loan as a source of income by taking out a reverse mortgage. This will let you access the equity in your loan in the form of regular payments which will be paid back to the bank following your death by selling your property. But like all financial products, it’s best to seek professional advice before you sign on the dotted line.

What is a debt service ratio?

A method of gauging a borrower’s home loan serviceability (ability to afford home loan repayments), the debt service ratio (DSR) is the fraction of an applicant’s income that will need to go towards paying back a loan. The DSR is typically expressed as a percentage, and lenders may decline loans to borrowers with too high a DSR (often over 30 per cent).

Mortgage Calculator, Loan Purpose

This is what you will use the loan for – i.e. investment. 

What is a construction loan?

A construction loan is loan taken out for the purpose of building or substantially renovating a residential property. Under this type of loan, the funds are released in stages when certain milestones in the construction process are reached. Once the building is complete, the loan will revert to a standard principal and interest mortgage.

Will I be paying two mortgages at once when I refinance?

No, given the way the loan and title transfer works, you will not have to pay two mortgages at the one time. You will make your last monthly repayment on loan number one and then the following month you will start paying off loan number two.

Does Australia have no cost refinancing?

No Cost Refinancing is an option available in the US where the lender or broker covers your switching costs, such as appraisal fees and settlement costs. Unfortunately, no cost refinancing isn’t available in Australia.

Can I get a home loan if I am on an employment contract?

Some lenders will allow you to apply for a mortgage if you are a contractor or freelancer. However, many lenders prefer you to be in a permanent, ongoing role, because a more stable income means you’re more likely to keep up with your repayments.

If you’re a contractor, freelancer, or are otherwise self-employed, it may still be possible to apply for a low-doc home loan, as these mortgages require less specific proof of income.

Is there a limit to how many times I can refinance?

There is no set limit to how many times you are allowed to refinance. Some surveyed RateCity users have refinanced up to three times.

However, if you refinance several times in short succession, it could affect your credit score. Lenders assess your credit score when you apply for new loans, so if you end up with bad credit, you may not be able to refinance if and when you really need to.

Before refinancing multiple times, consider getting a copy of your credit report and ensure your credit history is in good shape for future refinances.