Time to refinance: here are some things to keep in mind

If you’ve had a home loan for a while, then you might have wondered if there’s a better deal out there. Or, if your home has gone up in value, you may have even considered accessing your equity to renovate or buy an investment property. Refinancing could be a way for savvy homeowners to save money and get ahead. But before you approach a lender, here are some key things you should keep in mind.

First things first

All right, now that you know what to watch out for, refinancing could make a lot of sense for you. We’ve got an article that goes deeper into the subject, but here are a few reasons why you might consider refinancing: it’s been a while since you reviewed your home loan; you’ve had a change in lifestyle; you’ve worked out you want to use your equity in your home; you’re looking to consolidate your debts; or you’ve had life… happen and faced an unexpected event or financial change.

If you’re looking for a lower rate

The conventional wisdom is that if you haven’t reviewed your loan in the last 2-3 years it could be worth shopping around to see if you can get a better rate. But you should consider the term of your current loan versus your refinanced loan. If the new, refinanced loan is for a significantly longer term than what’s left on your current loan, you might only be extending your repayments and could end up paying more in interest over the life of your loan, even though you have a lower rate.

So try to make sure the new loan is for roughly for the same term as the time left on your current loan, and make sure you do the numbers before you sign on the dotted line.

If you want to lower your monthly repayment

You might be looking to refinance to lower those monthly repayments. This could be a wise choice if you’re looking to rearrange your finances or boost your budget (for whatever reason).

When you extend the term of your loan to try and reduce your weekly repayments, be aware that you may end up paying more interest over the term of the loan, even with a lower interest rate. A longer term could mean more interest, basically. But, if the loan allows, you could make regular extra repayments – when you have money available – to repay the loan faster which could help make up the difference.

If you’re not sure it’s the right time to refinance

It’s important to be in a stable financial position when you refinance your loan. So be honest with yourself about where you stand before doing it. For some, it doesn’t quite make sense to switch right now. If any of the following situations sound like yours, take a breath – you may choose to wait.

• Your property has decreased in value to a point where the equity won‘t cover a 20% deposit on a new loan amount. This means your loan-to-value ratio (LVR) will be higher than 80%, so you may have to pay lenders mortgage insurance (LMI). If you do have to pay LMI It might be better off waiting until the market rises again.
• Your credit history has taken a hit due to missed repayments, forgotten bills or outstanding debts. Large credit card debts or limits could also affect your history. Before refinancing, consider taking steps to pay down your credit card and loans as much as possible, and think about lowering your credit card limits (especially if you’re not using them).
• If you are a few years into a home loan, be wary of refinancing to a loan with a longer term than you have left on your current home loan, as it could end up costing you more.
• Your current home loan, or part of it, is a fixed rate loan. Breaking a fixed rate loan could mean that you’ll pay Break cost fees and they could be expensive, so the costs may outweigh the savings. Do the numbers, then you’re golden.

Keep costs in mind

Refinancing might come with exit and entry costs, application charges, valuations, possible stamp duty and legal fees, transfer fees and with some lenders, mortgage insurance if you don’t hold that 20% equity. And if you have a fixed interest rate loan, you might need to factor in Break cost fees.

All these upfront costs need thinking about because they could eat up the savings you plan to make by refinancing. So, factor in that you might not break even for a year, or even longer. Maybe do a cost analysis or crunch the numbers with our buying costs calculator. Find your break-even point (i.e., the sweet spot where your savings outstrip the costs) and aim to keep your new loan for this period, and perhaps beyond.

See how much you could save

Want to see the difference refinancing with an ING home loan could make? Head to our refinancing page and use our refinance calculator to find a loan that works for you.