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Refinancing: Benefits or Risky Business?

Refinancing Benefits or Risky Business?

By Amy Bradney-George
September 14, 2009

As the economic downturn continues to impact our financial stability, refinancing your home loan is a more promising option for many home owners.

Paying off a mortgage can sometimes seem like financial burden, and the seemingly never-ending repayments place added financial pressure on many families.

But with the right knowledge, mortgage stress can be significantly reduced through refinancing.

Home loan rates and products change regularly and as Damian Smith, RateCity’s CEO explains, comparing loans and taking action can save a lot of money.

“By looking at what loan you have and what is out there you can save money and protect yourself from further interest rate rises.”

Mr Smith said it’s now easier to find great deals than it has been in the past.

“One of the underlying factors, which I hope we can fix, is having access to the right information. The internet is a great tool for people considering refinancing because it provides up-to-date information and comparisons on interest rates and features.”

While changing loans can be challenging, Bankwest‘s Head of Mortgages, Dean Gillespie, said it’s often worth it.

“It’s important to have a good understanding of what home loan offers are out there so customers can keep competitive. With the right loan you can save thousands,” he said.

Adding it up
Working out how much money can be saved is the most important step in figuring out whether refinancing is right for you.

For instance, Mary is paying off a $275,000 mortgage at 5.78 percent p.a. Her monthly repayments would be about $1,735. The total financial cost over the life of this 25-year loan would be about $520,500.

If this loan was swapped for one with a lower interest rate, like Homestar’s Standard Variable Home Loan which has a comparison rate of 5.03 percent p.a., repayments for the same loan would be $123 less each month.

The total financial cost for this loan would be about $483,730. If Mary paid a $10,000 break cost to cancel her original loan, she would still be about $26,770 better off switching home loans.

What are the risks?
Before signing up to switch home loans, talk to both lenders to find out what process you will have to take with them.

In many cases, Mr Smith said, lenders will do as much as they can to keep you as customers.

“Financial institutions may have a lot more discretion than they let on. The only way you can negotiate these things is if you have the right information to back up your position.”

Be aware of what sort of exit fees you would have to pay. Business consultancy firm Fujitsu Australia and New Zealand, found that in April this year, 42 percent of households with fixed rate mortgages would have to pay $10,000 or more to switch loans.

The ‘deferred establishment fees’ on many variable rate home loans are harder to estimate with rate changes, but it’s vital to find out how much you would have to pay to refinance.

Mr Gillespie said exit fees should not deter people from seriously thinking about refinancing.

“Some banks hit hard with exit fees on their home loans. But before this discourages you, weigh these fees against potential savings because it can still be worth it,” he said.

The three steps to refinancing
Below are three important steps in the refinancing process that will help maximise how much you can save.

  1. Comparing rates – The most important step is comparing home loans online to find out the current rates, fees and features. This will help you determine how much you can save if you switched.
  2. Read the fine print – Check out the terms and conditions of your current loan and compare them with all prospective home loans. If you’re not happy with your mortgage, think about whether it’s because of the repayments, the service or the features. Comparing the different features and conditions available by other lenders will help you find a loan that suits your needs.
  3. Take action – Don’t be afraid to speak to your lender before things get ugly and explain your situation. Most financial institutions offer a variety of services including branch officers, information online or over the phone.

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