A guide to mortgage refinancing

A Guide to Mortgage Refinancing

Refinancing your home loan may allow you to access better rates, but you need to consider several issues before you make a decision. With this guide, you’ll have a better understanding of refinancing and what you need to do to prepare yourself.

| | 8 minute read

Refinancing your home loan can open several new opportunities for you. Lenders and banks might offer better rates than they have done previously because refinancing is a growing part of the home loan sector.

This means refinancing may offer you a better interest rate than you have on your current mortgage. But that’s not all you need to consider. Refinancing may also raise several other issues, so you need to understand your position before making this decision.

When done right, refinancing will help you to save a large amount of money.

When Might Refinancing Not Make Sense?

There are several issues that could prevent you from refinancing. These include the following:
• You face high break costs on your current loan.
• Debts created since you took out your original home loan have damaged your credit score.
• You don’t have a stable job, or your current job does not provide a stable income. For example, freelancers may struggle to refinance.
• You’ve paid off very little of your existing home loan.

When Could Refinancing Make Sense?

So, when might refinancing make sense for you? You may benefit if you fall into one of the following categories:
• Your financial situation has changed considerably for the better.
• You’ve found that other lenders have better rates.
• You need money for a major purchase, such as a renovation or investment.
• You wish to consolidate other debts into your home loan.
• Moving to a fixed rate mortgage would benefit you at the present time.

Consider Your Motives

A competitor’s low interest rates may be the main driving force behind your decision to refinance. But it should not be the only one. That interest rate may not last for the duration of the loan. As such, you need to think about the benefits and drawbacks that emerge over the lifetime of the new loan.

There are also costs attached to moving to a new lender. Beyond break fees, you will need to consider fees for applications, government costs, and valuation of your property. Furthermore, you may face other long-term fees.

The Case for Refinancing

There’s always value in weighing up your options from time to time. Even if you don’t have a direct reason to refinance, it helps to know where you stand and what you might achieve with refinancing.

Loan products change constantly with the market. That means there’s always the chance that a better deal is out there for you.

Consider checking your current home loan against new products at least once every three years. This will show you if the fees you’re currently paying are too high when compared to other lenders’ products. You may find refinancing offers you more flexibility. The three-year period also helps you keep control of your interest rates and manage any break fees you would absorb.

Also, check for new loans a few months prior to the end of your three-year period, but don’t commit until afterwards. Completing that initial three-year period on your loan should lower the break fees you’ll face.

Some Reasons for Refinancing

Now, what about the reasons for refinancing? You’ll probably want to refinance to secure a better interest rate or make lower repayments. This is especially true if your lender changes their rates during the course of your original loan. Not all lenders change their rates in line with those the Reserve Bank sets. Some even have their own cycles. Refinancing at the right time could help you to avoid interest rate increases.

Others look at refinancing as a debt management solution. You could consolidate debts you’ve built up since taking out the original home loan.

This works well if you have several debts, such as a combination of your home loan, a personal loan, and a credit card. Pulling these debts into a new home loan allows you to enjoy the lower interest rates that most home loans offer compared to other forms of credit.

But you must consider your repayments if you go down this route. Taking a mortgage that offers lower payments than your current loan may open you up to paying more interest over time. You’ll still need to pay off the loan’s principal, so you might be best to try and keep payments on your new loan at least the same as your old ones.

Finally, we come to the use of refinancing to use the equity you’ve built through your current loan. Borrowers usually go down this route to renovate their homes. While this increases the value of the property, it also means you will face a longer loan term.

The Case Against Refinancing

Now, let’s look at the situations where it might be in your best interests to avoid refinancing. For one, refinancing for only a slightly lower rate may be a mistake if you have a good relationship with your current lender.

Your existing lender may be willing to offer lower rates to keep you on board. You also need to consider the service you receive. A lender with a lower rate may not offer you a high-quality service.

Also, consider how long you’ve been paying off your current home loan. If you’re 20 years into a 30-year loan, you will likely end up paying more over a longer period if you refinance.

Beyond that, consider the break costs associated with your current home loan if it’s on a fixed rate. Weigh this against the benefits you would experience through refinancing. The penalty may be so large that refinancing won’t make sense. As a general rule, refinancing is not for you if your current loan is in the middle of a fixed rate period or has a low interest rate. All of the fees attached to the change may cost you more in the long run.

Taxation Issues

The taxes you pay should also play a part in your decision to refinance. This is vital if you’re considering refinancing an investment property.

Investors cannot claim deductions for expenses in investment properties unless they borrow against the property in question. You also need to consider the regulations that the Australian Taxation Office has in place.

Seek advice from a tax professional before moving forward.

Is Now the Right Time?

The terms of your loan will play a huge part in your decision. They may benefit you in the short-term, but they will also tie you into some long-term obligations. The choice between a variable and fixed rate loan will also affect these obligations.

Consider your current income and whether your job offers the security required to take on such a large loan. This is very important if there’s only one wage coming into the house.

You will also find that refinancing to clear debt opens you up to high rates. These will often be lower than personal loan and credit card rates but may exceed what you’re comfortable with for a home loan. Always speak to a finance professional before going down this route.

Beyond that, you need to watch out for red flags from a lender that may indicate they may not be the best choice. Do some digging. Lenders that communicate poorly or seem slow in processing your application may display those traits once they’ve given you the loan. This poor service will not benefit you over the course of 30 years.

Your existing lender may also be able to help you refinance.You may even find that your lender will waive certain fees or use other tactics to keep you on board. Remember, lenders don’t want you to go to the competition, especially if you make payments on time. Use this as leverage and you may secure a better deal.

If you do decide to use a different lender, make your financial status as clear as possible. Pay your debts off and get rid of any credit cards that you don’t need.

What to Do Next

Ideally, your mortgage broker will reach out to you with information about refinancing. But you may find they might even prefer to keep you on your original home loan. If you are considering refinancing, take these steps:
Find out more about refinancing with uno.
Search for refinance deals that match your situation.
Speak to an uno mortgage advisor using our live chat.

This information is general in nature, and you should always seek professional advice when making financial decisions.


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Alexi Neocleous

With over 20 years experience, Alexi has written extensively a wide cross section of financial topics. These topics range from financial planning, mortgages, property commentary and all points in between.

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