If you’ve had a home loan for a while, then you’ve no doubt thought to yourself at some stage, ‘Is there something better out there?’ Or, if your home has gone up in value, you may have thought about accessing your equity to renovate or buy an investment property.
It’s why refinancing has come to be seen as a way for savvy homeowners to save money and get ahead. And for many it may be the case. But equally for many it may not.
So before you approach a lender, here’s some key things you should keep in mind:
About that lower rate
If you can reduce your current interest rate by between 0.75% to 1%, or even more, then it usually makes sense to refinance.
But if you are between 10 to 15 years (or longer) into your home loan term, then you need to consider the duration of your new loan. If the new loan is for a significantly longer period than your current loan has left, you could be extending the years of your debt and could end up paying more in interest, even though you have a lower rate.
Try to ensure any new loan is for approximately the same term as your current loan has left and do the numbers before you sign on the dotted line.
Other costs to weigh up
The costs of refinancing might include exit and entry costs, application charges, valuations, possible stamp duty and legal fees, transfer fees and Lender’s Mortgage Insurance if you don’t hold 20% equity. And if you have a fixed interest rate loan, you will need to look at the exit costs as they can be expensive.
This means the savings you plan to make could be eaten up by these upfront costs and you might not break even for more than a year, or even longer. So it pays to do a cost analysis before you sign on the dotted line. Even better use our buying costs calculator to do your numbers. The trick is to find your break-even point (i.e. how long it will take for your savings to outstrip the costs) and keep you new loan for this period at the very least.
Lowering your monthly repayment
Another reason people refinance is to try and lower their monthly repayments. If you’re looking to rearrange your finances, budget or if you’re battling to make your repayments for whatever reason – this is a valid and strategic choice.
If you extend the term of your loan to reduce your weekly repayments, you just need to be aware that you may end up paying more interest over the term of the loan, even if the interest rate is lower. But you can make regular extra repayments to repay the loan faster and make up the difference.
Is now the right time to refinance?
In this current market you will need to be in a strong, stable financial position to refinance your loan. So you need to be honest about where you’re sitting before thinking about refinancing. There are also those for who it just doesn’t make sense timing-wise to switch. Those in the following situations may want to wait:
- Your property has decreased in value to a point where you no longer hold the equity you need to cover a 20% deposit on a new loan amount. You may be better to wait until the market rises again.
- Since you took out your home loan your employment situation has changed (for example you’ve moved from full time employment to contract or freelance work).
- Your credit history has taken a hit due to any missed payments, forgotten bills or outstanding debts. Large credit card debts or limits also impact on your history. Before considering refinancing it may be wise to not take out any large loans, pay down your credit card as much as possible, and lower your credit limits even if they’re not being used.
- If you are 10 to 15 years into a home loan, be wary of refinancing to a loan with a significantly longer term than you have left on your home loan, as it could extend your years of debt and end up costing you more in the long run.
- Your current home loan, or part of it, is a fixed rate loan. Exit fees can be expensive on fixed rate loans and the costs may outweigh the savings.
Homeowners who could consider refinancing
Alright now that you know what to watch out for, there are still many instances when refinancing makes a lot of sense. Below is a quick outline, but our article – Is it time to refinance your home loan? – goes into the subject in more depth.
- Your current lender’s loan rate isn’t keeping pace with the competition, or they’re raising their rate out of step with the Reserve Bank. If you are in the financial position to refinance, then it could be time to seek out a better deal. Even though lending criteria has tightened up, interest rates are still low and there are some very competitive rates and loans.
- You have a new job with a step-up in salary. Even in today’s tight credit market, this puts you in a situation where you can compare loans to ensure you’re getting the best rate and perhaps borrow more.
- You hold significant equity in your home and want to borrow against it to make renovations, buy an investment property, go on that dream holiday or buy a new car. Be aware that lenders will also take into consideration your current income, job status, savings, financial commitments, living expenses and credit history.
- You want to consolidate multiple debts (credit card, personal, car or other high interest loan) into one monthly repayment.
- You’ve experienced an unexpected life event or financial hardship – and you need to refinance to improve cash flows and affordability. This will be dependent on your ability to afford the new repayments.
Talk to a specialist
If you’re interested in refinancing and want to know more, talk to one of our home loan specialists. They can take you through all your options and the process – all with no obligations, just friendly support. Then if you choose to refinance with us, we offer competitive rates, no ongoing monthly or transactional fees, unlimited extra repayments, offset facilities and redraw at no extra cost.
To talk to an ING home loan specialist simply call 1800 100 258, 8am – 8pm AEST, Monday to Friday or 9am – 5pm AEST on Saturday.
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