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Six things to know before refinancing your home loan

Six things to know before refinancing your home loan

There’s no doubt that mortgage refinancing is having its day in the sun.

The number of people refinancing to an external lender ballooned by 27 per cent between March – when the cash rate was cut to 0.25 per cent – and June 2020, data from the Australian Bureau of Statistics showed. More than 19,000 mortgage holders refinanced $8.9 billion worth of home loans with another lender in June.

They may be pleased to hear they have the support of Reserve Bank of Australia (RBA) governor Philip Lowe, who urged mortgage holders to shop around for a better home loan rate, and if they get turned down by their current lender, to head to a competitor.

In some cases, making the switch can help you save on mortgage repayments. Refinancing may also be handy if you want to consolidate your other debts, including personal loan and credit card debt, into your mortgage. If you’re on a variable-rate home loan, or if your fixed-rate term is ending soon, it could be a good time to think about refinancing. Consider speaking with a financial expert for advice on your personal financial situation.

Here are six things you should take note of before refinancing

1. Pay attention to the interest rate and loan type

According to the RBA, average variable interest rates fell by 0.34 per cent, while average fixed rates for owner-occupiers dropped by 0.45 per cent in the five months to June 2020.

With such strong competition in the home loans market, it might make sense for some people to consider switching to another lender. But it’s important to compare interest rates to make sure the numbers are in your favour. It’s now common to see interest rates under the 3 per cent mark, with a select few even dipping below 2 per cent

Keep in mind, it’s just as important to understand whether a fixed rate or variable rate is right for you. While many people are opting for fixed-rate mortgages, locking in your interest rate may not be suitable for you if there’s a chance you might sell your property during the fixed rate term. Otherwise, a fixed rate can usually provide some certainty with budgeting as your repayments would generally be the same during the fixed rate term.

2. Decide what features are important to you

Only you know what’s best for you. Before refinancing, it’s wise to evaluate what you want in your home loan, whether that’s:

  • To save money;
  • Pay your loan off sooner; or
  • To use any savings you might have to offset your home loan balance. 

From here, you can then work out which features are important to you:

  • Low interest rate
  • Low fees
  • Ability to pay it off sooner
  • Ability to offset your savings
  • Package (with a credit card, line of credit, home insurance etc)

It’s likely you won’t be needing all of these features. For instance, it might not be worth stumping up extra for an offset account if you aren’t going to use it.

3. Be careful not to extend your mortgage

A common trap for refinancers is extending their loan term without even realising. This is all the more important to consider if your top priority in a home loan is to pay it off sooner.

For example, if you’re 10 years into a 30-year loan, and you refinance to another 30-year mortgage, you may actually be losing money over the life of your loan, as opposed to saving money. This is because you’re likely to be paying more interest costs for the extra years you’ve signed on for (sometimes unintentionally), even if refinancing to a 30-year home loan will make your monthly repayments lower. It could be a good idea to consult a mortgage broker for professional advice on this.

4. Check what fees and charges apply

If you decide to refinance, it may pay to check the fees and charges that could apply – both from your old and new lenders. You may not be able to dodge break or discharge fees from your current lender. But your new lender may also charge you upfront fees, and you could always try to negotiate these charges.

One way to approach the negotiation is to ask your new lender if they can waive the upfront fees. Make it clear to them that you’re considering, or even in talks with, other lenders. With raging competition among mortgage lenders, it’s possible they may say yes to pull another customer onboard.

5. Beware of the bank’s valuation

Lenders often need to revalue your property if you are refinancing your home loan. If the valuation of your property has gone down or is lower than you expected, your loan-to-value ratio (LVR) could go up. This might also affect the interest rate a lender is willing to offer you. 

Let’s say you’ve owned your property for five years, and thought the LVR of your mortgage was 80 per cent or more by now. You decide to refinance and the new lender sends a valuer to your property, who values it at less than the price you bought it for five years ago. This means the equity you hold will be less than 20 per cent, meaning the lender may charge you lender’s mortgage insurance (LMI). There’s also a chance the lender may decline your refinancing application if your LVR is too high. If your valuation comes back lower than expected, it could be worth speaking to your mortgage broker or lender, as well as attempting to get a second valuation.

6. Assess your financial position

It’s important to ask yourself whether your financial position has changed significantly since you first purchased your property. Things that might contribute to a changed financial position include:

  • New job – as this may impact your borrowing power;
  • New debts or loans – extra financial commitments may affect your ability to service repayments; and
  • Having a child – this could seriously change your lifestyle and add to your everyday expenses.

Given that banks are expected to ramp up their scrutiny on serviceability post-pandemic, it could be a good idea to consult your lender or a mortgage broker for professional advice on your refinancing approval chances. https://www.ratecity.com.au/home-loans/mortgage-brokers

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This article was reviewed by Personal Finance Editor Georgia Brown before it was published as part of RateCity's Fact Check process.

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