Refinancing can provide you with a lot of benefits, but it’s important to avoid making any refinancing mistakes. Below are some common mistakes that borrowers make when refinancing their home loans, and how you can avoid making those mistakes.
Mistake #1 – Unnecessarily extending your home loan term
Extending your home loan term lowers your repayments. But if you do that unnecessarily, you’ll end up taking longer to pay off your home and you’ll also pay more interest.
The only valid reason for extending your home loan term is if you genuinely can’t afford your repayments. It’s definitely a preferable option to getting behind on your repayments and your lender potentially repossessing your home.
Mistake #2 – Getting sucked in by “honeymoon” rates
It’s important to understand that lenders in Australia compete aggressively for home loan business. It’s a lucrative, secure, long-term income stream for them, because standard home loan terms are 25 or 30 years.
Home loans are also backed by the security of a mortgage. This means the lender can repossess your property if you fall significantly behind in your home loan repayments. If you do, they can sell your home to recover the amount you owe.
Lenders will often aggressively advertise “honeymoon interest rates” for home loans. These are lower-interest rates for a short period (usually 6 months or a year). They are designed to attract new borrowers or people looking to refinance.
After the honeymoon period ends, the low rates revert to their standard rates. Their standard rates may not be the best on the market, but you could be stuck with them long-term and that will cost you more in the long run. It’s important to remember that a home loan is a long-term financial commitment.
Mistake #3 – Refinancing if you have less than 20% equity in your home
‘Equity’ means the proportion of your home that you own. For example, if your home is currently worth $600,000 and you owe $450,000 on your home loan, you own $125,000 worth of it (which is 25% of its value). Lenders will get your home valued as part of the refinancing application process.
If you refinance with a different lender when you own less than 20% of your home, you’ll need to pay for the cost of lenders’ mortgage insurance (LMI). LMI protects the lender if you default on your repayments, and it can cost $10,000 or more on an average home loan. The amount is typically added on to the loan, so you pay it off (plus interest) throughout your loan term. This LMI cost will already have been charged by your original lender, so you could end up paying it twice.
How we can help
At Wisebuy Investment Group in Newcastle, our licensed and experienced mortgage brokers can help you to refinance your home loan and avoid making any mistakes. And best of all, our service is free!
Contact us today for an obligation-free chat to find out more. We’d love to hear from you!