Traditionally, many borrowers would stay with their home loan lender for the life of the loan, but now that the mortgage industry is even more competitive, it is worth shopping around.
There are a number of myths floating around about refinancing that have been busted below.
Too costly to refinance
Refinancing your home loan may not cost as much as you think with exit fees being banned on 1 July 2011 (for loans established after this date). Most lenders will charge fees to discharge the loan and possibly a legal fee. These cover the cost of releasing the title and closing down the loan account.
The main cost that deters home owners from refinancing is lenders mortgage insurance. If you borrowed more than 80% of the value of the property initially then chances are you would have had mortgage insurance added to your loan. Mortgage insurance is lender specific so if you subsequently look to refinance and the loan is still above 80% of the value of the property then mortgage insurance may be levied again.
When refinancing it is important to understand what similar properties have been selling for in your area, to get an idea of what your home might be worth. Some lenders may be able to supply an RP Data report which will give a guide. State Custodians has a free property suburb report which gives a good list of recent sales that may help in your research.
Although there may be some fees included to switch lenders, if you find a lender who offers lower interest rates, little or no upfront fees or ongoing fees, you may find that you will receive greater savings over the life of the loan that outweigh these initial fees. However, it will require research beforehand to ensure you are getting the best deal.
Too much hassle to refinance
Although refinancing will take some effort, it will not necessarily be a hassle. Most lenders are eager to bring in new borrowers and will be more than happy to work with you to find a suitable home loan option and make the application process stress free. You will need around six months loan statements for your current loan and recent payslips so it will pay to have these handy.
If you find that a lender is not making the effort to respond to your enquiries or process the paperwork promptly, they may not be the most suitable option for you. Poor service before you apply could mean that service ongoing is poor and be an ongoing frustration.
One of the best places to start is comparing interest rates being offered by different lenders and then contacting your current lender to see if they will reduce your rate to match. If you are successful then you will have been able to reap the benefits of refinancing without much hassle at all!
Not worth refinancing if rate is only 0.5% lower than current rate
Any interest rate discount can have a savings impact. For example, if you had a $400,000 loan over 30 years with a 5.5% interest rate, but then switched to a loan of 5.0%, you could save close to $125 a month or close to $45,000 over the loan term.
However, the interest rate isn’t the only factor that can help save you money on your home loan. Don’t forget to factor in differences in ongoing fees with your current loan and the new one you are considering. Dropping an annual fee from $495 to $299 or even no ongoing fees could mean more money in your pocket over the long term.
There are a number of features that can save you a significant amount of money over the life of the loan. An offset account, free redraw and unlimited extra repayments are just some examples. To get an idea of how much you could save by having a set amount in an offset account try this calculator. The repayment and savings calculator has a handy savings tab that allows you to factor in money in an offset account and how much it could save you in interest and reduce the loan term.
Borrower’s with a fixed rate loan cannot refinance
It is possible to refinance a fixed rate home loan, but you may incur break costs. Calculating break costs is complicated and takes into consideration how much your fixed rate is and how much variable rates have changed plus the term remaining on your fixed rate. But, you may find that the overall savings or refinancing may be more than the costs involved. Before making any decisions, speak with your current lender about what break costs are involved to ensure these costs do not outweigh the benefits of refinancing.
I was approved for my current home loan, so I’ll be approved for a refinance
Even though you were approved for your current loan, it does not automatically mean you will be approved for a refinance. If you decide to switch to a different lender, you will have to go through the same application process. The lender will need to look at your current financial situation to ensure you can afford the repayments.
The value of properties generally increase over time, but you may find that the value of your property has actually gone down. Research property values in your area to help ensure that you have sufficient equity to refinance.
The new lender will most likely get a valuer to inspect the property. A property in bad repair, termite damage or a partially completed renovation could mean that the new lender is not willing to use the property as security for the new loan.
If you have incurred more debt since taking out your current loan (e.g. car loan, personal loan, credit cards) then this may affect your borrowing capacity. So, before speaking with a lender about refinancing, try to reduce your debt as much as possible.