Before you travel down the refinancing road, it’s critical to pause and evaluate the process. Your plans may come undone if you proceed without knowing what exactly you’re getting yourself in to.
Having a defined goal and all the information you need on hand will help the refinancing process run smoothly as you will know exactly what to look for and where to find it. Below are the six steps to making the right refinancing decision that will help guide you through what can be a sometimes confusing and overwhelming process.
1. Define your refinancing goal
Before you start your refinancing journey it is important to know what you want to get out of the process. Your aim may be simply to reduce the size of your monthly repayments or to pay off your loan quicker. This may require you to look for certain features such as low interest rate loans and loans that allow extra repayments.
Other borrowers may wish to release the equity in their loan or consolidate other debts such as personal loans and car loans. Depending on what your goal is, the type of loan that you look for will vary and this is why it is important to establish early on what you want to get out of refinancing.
With literally thousands of home loans on the Australian market, being able to narrow down your search by aim will be the quickest way to get you to the right product for you. Take time at this first step to think about what a successful refinance would look like to you.
2. Find important information
Once you know why you are refinancing it will be time to prepare to begin the process. To do this you will need to arm yourself with the all the relevant information about your current loan that will help you determine what you need in a new loan. It will also help you to figure out the potential amount you could save by refinancing.
The information you should gather includes your current interest rate, your outstanding loan amount, the remainder of your loan term and your property’s current value. By understanding your current position, you will be better placed to see which lenders are offering a more competitive deal than your current loan.
3. Compare the alternatives
When you have the background information covered you can head online to start comparing the available alternatives to your current loan. While you are comparing loans you should keep some questions in mind like how much quicker will I pay off my loan if I switch to this alternative and how much will I be saving every month?
Depending on what features you are looking you may also wish to ask yourself if the loans you are considering will allow extra repayments, repayment holidays or any other feature you are interested in using.
4. Calculate the switch cost
Once you have settled on a loan that you are interested in you can get an accurate picture of what your switch costs will be. For your existing loan, you should check if there is a discharge fee and how much this will be. If you have a fixed loan you will most likely also incur an added break fee for ending the fixed period early.
On the new loan that you wish to refinance to, you should check for upfront fees such as application and settlement fees that will be payable to set up the loan. By reading the product disclosure statement of the prospective loan closely you will be able to identify any hidden fees and costs that may be associated with the mortgage.
5. Calculate break even point
After you have settled on a loan that you think suits your refinancing aim well, and you have a good idea of the switch costs involved, you can use this information to calculate your break even point. This is the amount of time that it will take you to start seeing the benefit of your refinancing decision.
You can calculate what your break even point will be by using a mortgage calculator to estimate your monthly repayments with your new loan and the difference between this and your existing repayment. Then, add up your total switch costs and see how many months it will take you to “pay” these costs off with the difference in your new repayment size.
Marie has an outstanding loan amount of $400,000 at an interest rate of 4.5 per cent for a loan term of 25 years. She wants to refinance to a loan with a 4 per cent interest rate to reduce her monthly repayment size. Marie begins to compare loans online and picks out one that she likes. She looks into the switching costs involved and sees that the whole refinancing process is likely to cost $600 in fees.
Marie knows that her current monthly repayment size is $2,223 and uses a mortgage calculator to determine that her new repayment size will be $2,111. The difference between these is $112 so she divides the switching cost by this amount and finds that in just over five months she would reach her break even point and start to see the benefits of the switch.
You can also calculate how much you will save over five years to get a longer term idea of the benefits of switching loans.
6. Make a decision
Now that you have all the facts together you can make a decision as to what you want to do. Refinancing may be the best option or you may prefer to contact your current lender and try and negotiate a better rate.
If you do decide to refinance you have the choice to switch lenders online or to engage the services of a broker to help you with the process.