TO REFINANCE OR NOT?

Refinancing means breaking your current home loan contract to take on a new loan with improved rates and features. It’s important to understand what’s involved, because the costs of switching home loans can sometimes outweigh the benefits.

1. Why refinance your home loan?

Here are some reasons why you might consider refinancing your home loan:

  • Your employment or income changes
  • You want to buy a new home or an investment property
  • To reduce your interest rate to something more competitive
  • To find a loan with better features
  • Dissatisfied with the level of service form your existing lender
  • Existing lender will not help you with a loan increase
  • To reduce the term of your loan
  • Unlock some of the equity in your home to use elsewhere
  • To consolidate debt
2. Breaking your current home loan contract

Unless you are on a very non competitive loan, it is often not worthwhile re-financing just to save a few dollars a month. The costs and time involved are generally too high, and there is never a guarantee that the new loan will remain competitive in comparison over the long term.

  • Exit fees: Find out what exit fees your current lender may impose. These are fees that apply when you break your current home loan agreement earlier than the specified term. They could be a set amount or a percentage of your loan.
  • Additional Fees: Depending on your individual circumstances, you may also be subject to other fees including: legal fees, government registration fees, discharge fees, property valuation fees and establishment fees for your new loan.

These fees, together with the home loan exit fees, could amount to several thousand dollars. This amount might, however, be offset by a lower home loan rate, or other beneficial features (such as additional payment options). You might ultimately break even in the medium term, depending on the size of your loan.

3. Finding the right lender to refinance your home loan

Once you have assessed all your costs and decided which loan is best for you, it is time to think about your preferred lenders. Before you sign up to any new deals, however, make sure you ask lots of questions, read the small print and don’t get forced into any quick decisions.

Here’s a checklist of questions:

  • What is your current interest rate?
  • Can you get a better rate?
  • What are monthly or annual fees on this loan?
  • What are the exits costs on this loan?
  • Are there any Early Repayment Fees?
  • Is there a Lenders Discharge Fee?
  • Is there a Fixed Rate Break Fee?
  • What is your current loan balance?
  • What interest rate saving is on offer with the new lender?
  • How long will it take to break even when you account for all the costs?

Other costs you may need to consider for setting up your new loan:

  • Mortgage Insurance Premium
  • Application / Establishment Fee
  • Valuation Fee
  • Registration Fee
  • Lenders Legal Fee
  • Settlement Fee
4. Structuring your new loan

It’s important to structure your loan in a way that fits with your personal situation:

  • Over what term you do you wish to pay off your loan
  • How frequently will you make payments (weekly, fortnightly, monthly)
  • What other costs are in your monthly budget?
  • Whether you want to split your loan into a part-fixed and part-variable. This split-style loan means that part of the loan is on a fixed interest rate with set repayments each month and part is on a variable rate, where you can make additional payments on top of your scheduled amount and thereby pay off the loan more quickly.

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