Refinancing traps and how to avoid them

Refinancing traps and how to avoid them

For the first time refinancer there can be many little traps throughout the process that can mean paying more than you expected.

All it takes to dodge these traps is being armed with the right information. This can be gained from talking to someone who has refinanced before, chatting to an impartial expert and reading as many resources as you can online.

Read on to find out the most common refinancing traps and how to avoid them.

Trap: Adding smaller debts to your loan

A common trap that people fall into when refinancing is to think that it’s a great way of rolling all their debts into one. It’s easy to see why people fall into this trap. It removes the pressure of having to pay off a small debt in a short time frame and a home loan interest rate is often lower than that on other debts.

So, what’s the big deal?

The problem comes when smaller debts, like car loans and credit card debts, are stretched out over the total loan term. By adding them to your principal loan amount, and paying them off over 20 or 30 years, you are allowing more time for interest to accumulate and will end up paying significantly more.

How to avoid: If you still want to roll your debts into your home loan, as a way of consolidating, that’s fine. It can be a good way of relieving immediate stress and financial pressure. The way to avoid this becoming costly is to then impose your own timeline of paying off the extra debt. This means making extra repayments every month until you have “paid off” your additional debt amount.

This will help you avoid paying excessive interest on your smaller debts but, as it is enforced by you, you can skip a repayment every now and then if you need to. This puts the control of the debt back in your hands while still acknowledging the need for the debt to be paid off ASAP.

Trap:  Borrowing more than you need

Housing image

If you’ve had your home for a while, and the value of your property has grown over time, you may find that when you come to refinance you are able to borrow more than you expected. This can seem like an exciting prospect as you are seeing the true value of your home presented to you as cold hard cash. But beware, it will not do you any favours in the long run to be repaying a loan that is bigger than necessary.

It is also not advisable to borrow more than 80 per cent of your property’s value when refinancing as you will be hit with a charge for Lender’s Mortgage Insurance.

How to avoid: Remind yourself why you decided to refinance in the first place. If the answer was to save money or to pay off your loan sooner, then you will not be doing yourself any favours by taking out a larger loan. If you did want to refinance to borrow more, make sure you know exactly how much you need before you go to your lender so that you are not tempted to go over the necessary amount.

Low rate refinancing home loans

 

 

Trap: Falling for honeymoon rates

Lenders, in an attempt to make less competitive loans more attractive, will advertise an introduction deal or “honeymoon rate” deal. This usually involves borrowers receiving a discounted rate for a set time period before the loan reverts to the standard variable rate. This rate is often much higher than not only the introductory rate but than the average rate on the market as well. The result is that the borrower, instead of saving money with the discounted rate, is sucked in to paying more over time.

How to avoid: The best way to avoid falling for this trap is to compare home loans by their comparison rate, not their advertised interest rate. The comparison rate will take into account the total cost of having a certain loan, including fees and a potential revert rate. This gives you a more accurate indication of the true cost of a loan.

 

Trap: Refinancing to a longer loan term

When people refinance, they often do not consider the implications that this could have on their overall loan term. It is common that lenders will refinance your loan to a 30-year term when you may have already completed several years of your loan. What this does is reduce your immediate monthly repayment amount but increase the amount of interest that you pay in total by potentially tens of thousands of dollars.

How to avoid: The easiest way to avoid this trap is to find out how long is left on your current loan before you refinance and then discuss with potential lenders up front how long you want your new loan to be. If they refuse to let you refinance to a loan term of the same length it will be worth looking for a lender who will.

Trap: Accepting upfront fees without negotiating

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While a lot of lenders charge some combination of set up fees, almost all of them will be willing to negotiate or waive these fees in order to earn your business. This is a cost that can end up being a couple of hundred dollars so if you do opt for a lender who charges upfront fees it is wise to not accepting them without a negotiation.

How to avoid: In your initial contact with your potential lender, let them know that you’re interested in their product but aren’t willing to pay the upfront fees. Do your research and find examples of similar loans that don’t charge upfront fees. You can use this as leverage to get your desired lender to lower or waive upfront fees.

 

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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 take a personal loan after a home loan?

Are you struggling to pay the deposit for your dream home? A personal loan can help you pay the deposit. The question that may arise in your mind is can I take a home loan after a personal loan, or can you take a personal loan at the same time as a home loan, as it is. The answer is that, yes, provided you can meet the general eligibility criteria for both a personal loan and a home loan, your application should be approved. Those eligibility criteria may include:

  • Higher-income to show repayment capability for both the loans
  • Clear credit history with no delays in bill payments or defaults on debts
  • Zero or minimal current outstanding debt
  • Some amount of savings
  • Proven rent history will be positively perceived by the lenders

A personal loan after or during a home loan may impact serviceability, however, as the numbers can seriously add up. Every loan you avail of increases your monthly installments and the amount you use to repay the personal loan will be considered to lower the money available for the repayment of your home loan.

As to whether you can get a personal loan after your home loan, the answer is a very likely "yes", though it does come with a caveat: as long as you can show sufficient income to repay both the loans on time, you should be able to get that personal loan approved. A personal loan can also help to improve your credit score showing financial discipline and responsibility, which may benefit you with more favorable terms for your home loan.

What is an interest-only loan? How do I work out interest-only loan repayments?

An ‘interest-only’ loan is a loan where the borrower is only required to pay back the interest on the loan. Typically, banks will only let lenders do this for a fixed period of time – often five years – however some lenders will be happy to extend this.

Interest-only loans are popular with investors who aren’t keen on putting a lot of capital into their investment property. It is also a handy feature for people who need to reduce their mortgage repayments for a short period of time while they are travelling overseas, or taking time off to look after a new family member, for example.

While moving on to interest-only will make your monthly repayments cheaper, ultimately, you will end up paying your bank thousands of dollars extra in interest to make up for the time where you weren’t paying off the principal.

What is a fixed home loan?

A fixed rate home loan is a loan where the interest rate is set for a certain amount of time, usually between one and 15 years. The advantage of a fixed rate is that you know exactly how much your repayments will be for the duration of the fixed term. There are some disadvantages to fixing that you need to be aware of. Some products won’t let you make extra repayments, or offer tools such as an offset account to help you reduce your interest, while others will charge a significant break fee if you decide to terminate the loan before the fixed period finishes.

What happens to my home loan when interest rates rise?

If you are on a variable rate home loan, every so often your rate will be subject to increases and decreases. Rate changes are determined by your lender, not the Reserve Bank of Australia, however often when the RBA changes the cash rate, a number of banks will follow suit, at least to some extent. You can use RateCity cash rate to check how the latest interest rate change affected your mortgage interest rate.

When your rate rises, you will be required to pay your bank more each month in mortgage repayments. Similarly, if your interest rate is cut, then your monthly repayments will decrease. Your lender will notify you of what your new repayments will be, although you can do the calculations yourself, and compare other home loan rates using our mortgage calculator.

There is no way of conclusively predicting when interest rates will go up or down on home loans so if you prefer a more stable approach consider opting for a fixed rate loan.

What is a comparison rate?

The comparison rate is a more inclusive way of comparing home loans that factors in not only on the interest rate but also the majority of upfront and ongoing charges that add to the total cost of a home loan.

The rate is calculated using an industry-wide formula based on a $150,000 loan over a 25-year period and includes things like revert rates after an introductory or fixed rate period, application fees and monthly account keeping fees.

In Australia, all lenders are required by law to publish the comparison rate alongside their advertised rate so people can compare products easily.

Monthly Repayment

Your current monthly home loan repayment. To accurately calculate how much you could save, an accurate payment figure is required. If you are not certain, check your bank statement.

What is a variable home loan?

A variable rate home loan is one where the interest rate can and will change over the course of your loan. The rate is determined by your lender, not the Reserve Bank of Australia, so while the cash rate might go down, your bank may decide not to follow suit, although they do broadly follow market conditions. One of the upsides of variable rates is that they are typically more flexible than their fixed rate counterparts which means that a lot of these products will let you make extra repayments and offer features such as offset accounts.

How can I calculate interest on my home loan?

You can calculate the total interest you will pay over the life of your loan by using a mortgage calculator. The calculator will estimate your repayments based on the amount you want to borrow, the interest rate, the length of your loan, whether you are an owner-occupier or an investor and whether you plan to pay ‘principal and interest’ or ‘interest-only’.

If you are buying a new home, the calculator will also help you work out how much you’ll need to pay in stamp duty and other related costs.

What is the difference between fixed, variable and split rates?

Fixed rate

A fixed rate home loan is a loan where the interest rate is set for a certain amount of time, usually between one and 15 years. The advantage of a fixed rate is that you know exactly how much your repayments will be for the duration of the fixed term. There are some disadvantages to fixing that you need to be aware of. Some products won’t let you make extra repayments, or offer tools such as an offset account to help you reduce your interest, while others will charge a significant break fee if you decide to terminate the loan before the fixed period finishes.

Variable rate

A variable rate home loan is one where the interest rate can and will change over the course of your loan. The rate is determined by your lender, not the Reserve Bank of Australia, so while the cash rate might go down, your bank may decide not to follow suit, although they do broadly follow market conditions. One of the upsides of variable rates is that they are typically more flexible than their fixed rate counterparts which means that a lot of these products will let you make extra repayments and offer features such as offset accounts.

Split rates home loans

A split loan lets you fix a portion of your loan, and leave the remainder on a variable rate so you get a bet each way on fixed and variable rates. A split loan is a good option for someone who wants the peace of mind that regular repayments can provide but still wants to retain some of the additional features variable loans typically provide such as an offset account. Of course, with most things in life, split loans are still a trade-off. If the variable rate goes down, for example, the lower interest rates will only apply to the section that you didn’t fix.

Remaining loan term

The length of time it will take to pay off your current home loan, based on the currently-entered mortgage balance, monthly repayment and interest rate.

Savings over

Select a number of years to see how much money you can save with different home loans over time.

e.g. To see how much you could save in two years by switching mortgages,  set the slider to 2.

How can I get ANZ home loan pre-approval?

Shopping for a new home is an exciting experience and getting a pre-approval on the loan may give you the peace of mind that you are looking at properties within your budget. 

At the time of applying for the ANZ Bank home loan pre-approval, you will be required to provide proof of employment and income, along with records of your savings and debts.

An ANZ home loan pre-approval time frame is usually up to three months. However, being pre-approved doesn’t necessarily mean you will get your home loan. Other factors could lead to your home loan application being rejected, even with a prior pre-approval. Some factors include the property evaluation not meeting the bank’s criteria or a change in your financial circumstances.

You can make an application for ANZ home loan pre-approval online or call on 1800100641 Mon-Fri 8.00 am to 8.00 pm (AEST).