Have you ever considered refinancing your home loan? If you haven’t, it’s worth considering every few years. You might be able to save yourself plenty of money, especially with interest rates in Australia being at rock bottom.
For the first time in history, some lenders are offering home loans interest rates that start with a 1.
Here are our top 6 refinancing tips.
Tip 1: Compare interest rates
Check the comparison rate of your current lender against other lenders. The comparison rate includes the cost of interest plus any loan fees. Find the lowest comparison rate you can.
Then you can use our refinance calculator to work out how much money you can save on your repayments at the lowest rate.
Tip 2: Negotiate with your current lender
If your current lender isn’t offering the lowest deal, try to negotiate with them. Many lenders may be prepared to offer you a better deal rather than to lose your business.
Tip 3: Check loan features
- Do you have existing loan features like an offset account or redraw facility?
- If so, do you make use of them?
- If not, could you use them?
It’s important to understand that loan features cost money. It’s important to use them so you get more benefits than they cost you to have.
Tip 4: Work out your potential refinancing costs
There can be costs associated with refinancing, especially if you are switching between lenders. You might be up for discharge fees with your current lender and application fees with your new lender.
It’s important that the benefits of refinancing outweigh the costs.
Tip 5: Check the refinancing loan term
Standard home loan terms in Australia are 25 or 30 years. If you’re refinancing, it’s important not to increase your loan term unless you need to. If you do, you’ll pay more interest overall, even though your regular repayments will drop.
For example, if you have 15 years left on your home loan and you refinance to 25 years, you will be making repayments for another 10 years.
Ideally, you should keep your repayments at the same level when you refinance. If you do and you refinance at a lower interest rate, you will pay off your loan faster.
Tip 6: Talk to a broker
Of course, if all of the tips above sound like too much work, you can ask a mortgage broker for advice. They understand the Australian lending market and they know where the great deals are.
Best of all, brokers work for clients, not for lenders. They may be able to negotiate lower fees on your behalf as well as get you a low interest rate.
Refinancing mistakes
Refinancing can provide you with a lot of benefits, but it’s important to avoid making any refinancing 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 much 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 six 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 $150,000 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
If you’re looking to refinance your home or investment property loan, our licensed and experienced brokers at Wisebuy can help. We can also help you with your refinance application.
We service a diverse range of clients in the popular Newcastle, Lake Macquarie and Maitland areas. Our brokers work with more than 60 lenders in the Australian market.
Contact us today for an obligation-free chat.
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