Refinancing your home loan is not as scary as you think. So how can you get on board and save more on your home loan?
According to new research, the number of mortgage holders considering refinancing has risen in the past year. The latest Australian Bureau of Statistics (ABS) Housing Finance data shows that the number of home loans being refinanced has surged by 20 percent in the past twelve months compared to December 2014 (18,183 refinances in December 2014 vs 21,896 refinances in December 2015).
Bessie Hassan, Consumer Advocate at finder.com.au, believes that this growth in refinancing numbers is expected to continue as customers rush to take advantage of historically low interest rates with the total value of refinanced home loans expected to reach $100 billion this year, compared to $77 billion in 2015.
“As it stands, the cash rate is at a historical low and providers are offering among the lowest rates ever seen – borrowers can potentially save thousands of dollars per year by making the switch to a better deal.”
For example, the 21,896 Australians who refinanced their home loans last December collectively would have saved about $148 million in interest by fixing their mortgage for three years at a cheaper rate,” says Ms Hassan.
While refinancing does have the potential to save you thousands on your home loan, some borrowers often fall into certain traps, which ends up costing them more money in the end.
For example, the 21,896 Australians who refinanced their home loans last December collectively would have saved about $148 million in interest by fixing their mortgage for three years at a cheaper rate.
So what are these refinancing traps and what can you do to avoid them?
Some mortgage holders assume that their property has increased in value since they bought it, but this is not always the case.
If your property loses value or hasn't increased enough to take your lending under 80%, you may have to pay Lenders Mortgage Insurance. This is a one off fee that could cost thousands of extra dollars and could possibly outweigh the benefits of a more competitive interest rate.
What is Lenders Mortgage Insurance?
LMI is an insurance that lenders take out in order to be able to lend to borrowers who have a smaller deposit (ie generally when the amount you are lending is more than 80% of the value of the property).
Find out more about LMI here.
You may not know what your home is worth until the valuation is done but there are a few ways to get an indication. There are a number of property valuation tools available online that can give you an indication of what your property is worth in the current market.
You may assume that refinancing to a home loan with a better interest rate will save you money, but this is not necessarily the case. Exit fees for your current loan and establishment fees for your new home loan may actually outweigh the savings of a lower interest rate.
While the Government abolished exits fees for variable home loans, if you obtained your loan before July 2011, these fees may still apply to you. Some lenders may also have break fees if you are within a fixed rate period of your home loan.
If there is a home loan with a better interest rate, it is also important to consider the other fees and features it has. For example, you may be able to save in interest with an offset account or the ability to pay extra and redraw. If you refinance and lose these features, you may be worse off.
Find out more about what fees you can expect when refinancing your home loan here.
When you refinance, you need to approach the situation the same way you would if you were applying for a whole new home loan. Lenders will still assess your current financial situation, so it’s important not to assume you will be approved for a refinance just because you were approved for your current home loan.
If you know you have recently defaulted on a loan, credit card or utility bill, you need to check if this has been listed on your credit report. You can get a copy of your credit file for free. When assessing your home loan, the lender will check your credit report and any infringements may affect your borrowing power. As a result, your loan application may be declined.
Some borrowers don’t realise the importance of the comparison rates A comparison rate will give you a better insight into what a home loan will cost you as it includes all the ongoing fees.
Did You Know?
Ever wondered what the second interest rate was next to the advertised interest rate? That is the comparison rate. Lenders are legally required to provide both interest rates when advertising.
Find out more about comparison rates in our blog, What is a comparison rate?
There are limitations to keep in mind though. The comparison rate is calculated on a loan amount of $150,000 and a loan term of 25 years. So if your loan is a lot different to this, the comparison rate may not be accurate for your loan.
You can get a personalised comparison rate that is tailored to your situation with a Key Facts Sheet. These are available online with most lenders. Generate these for the loans you are comparing to help understand how the loans compare for your loan and loan term.
For a Key Facts Sheet for a State Custodians loan Click Here
Finding a lender with a broad range of competitive home loans with plenty of features is a great first step to refinancing. The team at State Custodians are experienced Lending Specialists ready to answer any questions you have.
Give our friendly team a call today on 13 72 62 or leave your details here for a Lending Specialist to contact you.