The new year is a good time to spring clean your finances, and a good place to start could be with one of your biggest debts: your home loan.
The RBA cash rate, which was cut three times in 2019 to 0.75 per cent, is expected by many experts to drop again in early 2020.
If it does, it may be a good time to think about refinancing your home loan for a better deal.
Even if the rate doesn’t move in February, you could still consider refinancing if your fixed rate home loan period ends in 2020. Once the fixed rate period ends, the mortgage interest rate will typically creep up, so it’s worthwhile checking if there are options with lower interest rates.
You might also choose to refinance to roll your other debts, like personal loans and credit card debts, into your mortgage. A consolidated debt can be easier to manage, and you could be facing lower fees. But overall, you might also be paying more interest in the long run when consolidating your short-term loans into your long-term one. So, it’s important to do your calculations to ensure you select the best option for you.
On top of that, in the record-low interest rate environment, competition is ramping up for lenders, with many passing on a full or partial rate cut in 2019. Remember, lenders generally want your business, so it doesn’t hurt to shop around and ask.
Some of the charges you could be facing when switching lenders include discharge fees, application or establishment fees and potential lender’s mortgage insurance (LMI). Make sure the savings you make from the lower interest rate do outweigh the various costs associated with refinancing.
To see if switching is for you, consider crunching the numbers using RateCity’s Refinance Calculator.
When you should not refinance your home loan
While many factors are indicating that the time is ripe to consider refinancing for some property owners, not everyone is in a position to switch home loans in 2020.
If you don’t have at least 20 per cent equity in your home, it might not be the best time to refinance yet. Equity is the proportion of your property that you actually own yourself, not through the mortgage lender because you have paid that part off. This is the difference between the property value and the amount you still owe on your mortgage principal.
The reason why you may not want to switch lenders without a 20 per cent equity is because you’re likely to be hit with LMI. When first buying a property, borrowers usually have to pay LMI when there is less than 20 per cent equity in the property. This is the same when refinancing, as you are essentially taking out a new loan.
If you don’t have 20 per cent equity, you may still be able to switch lenders if you are prepared to pay LMI, which costs thousands of dollars. If you already have LMI with your existing lender, you won’t be able to bring it over to your new lender when refinancing.
Be aware that if you are happy with forking out the LMI by adding it into the home loan amount, you’ll have to pay interest on it as well as your principal loan amount. This will increase your repayment amounts.
Lenders will also take into account your credit record, so if you don’t have a decent credit history, it may not be a good idea to refinance. Keep in mind that every application you make for a loan is included in your credit report, so it’s best not to make multiple applications in a short period.