When was the last time you looked at your home loan? The market is constantly changing, including the interest rates & there is also a chance that your own situation has changed since taking out your loan.
So although your current home loan may have been a great option for you then, there is a chance there may be better options for you now.
There are a large number of mortgage holders who set and forget their home loan. Regularly reviewing your home loan gives you the opportunity to check whether your mortgage and lender are still the best option for you.
Below is a simple explanation of what refinancing is and why you should consider it.
What is refinancing?
Refinancing is when you change home loans to an option that better suits your needs. Mortgage holders change lenders as they may find another lender who offers a more competitive rate, better features or superior customer service.
Reasons to refinance
Mortgage holders refinance for a number of reasons. Some include:
• To access equity. Once you have paid off a chunk of your home loan and over time the value of your property has increased, you can refinance to access this equity to fund these type of purchases. You basically increase your home loan to fund things like renovations, to buy a car, to fund a holiday or to buy another property. This allows you to take advantage of lower home loan interest rates rather than getting a personal loan with a much higher rate.
• To switch to a different loan type. Over time the type of loan you need may change. This could include changing from variable to fixed, interest-only to principal and interest, standard loan to a line of credit and package loan to a basic loan once loan balance reduces. This represents an ideal opportunity to shop around to see what options are available.
• To consolidate debt. Although we have the best intentions, small debts can creep up on us and we find we are in a position of having to meet multiple repayment deadlines on credit facilities with high interest rates. Sometimes it can be a relief to combine all these debts into one with a lower interest rate. If you have equity, you can refinance to increase your home loan to get the cash to pay them all out. Going back to a single repayment could give you the breathing space you need to get it paid off quickly..
• To obtain a lower interest rate. This is a prime reason for refinancing. A lower interest rate could save you a substantial sum over the life of the loan and help you pay of your home loan quicker.
• To obtain a loan with more features. Borrowers refinance to get features like an offset account, ability to pay extra and redraw for no cost, ability to split their loan into different portions, loyalty rate reductions, access to redraw via a number of methods including a debit card and internet banking. Features like these can save you money and make your home loan a lot more convenient.
How does a refinance work?
Refinancing is a reasonably simple process. Once you have found a lender and home loan that suits what you are looking for, you would then complete a loan application. The loan application gives a full rundown of you, your financial situation and will involve you supplying documents to back this up like payslips and statements from your current loan. Your lender should be available to assist and make this process as straightforward as possible. After doing an initial assessment to ensure that you can afford the new loan, they will then get your property valued. The valuation is critical to determine how much equity you have and how much you can borrow. Once the loan is approved, new loan contracts will be issued which you will need to sign and return. The new lender then takes care of changing the loan over. They take care of approaching the current lender, booking in a day to payout the loan and hand over the title to the property. You will be notified when settlement has occurred and your new loan has started.
What is the cost?
There will be costs involved in refinancing, both costs to exit the current loan and setup the new one.
If your home loan was taken out before 1 July 2011 there may be early exit fees. These were abolished for loans that were taken out after this. If early exit fees still apply to your loan, find out when they expire. Back then they were for around five years so you may not have to wait long to avoid them.
If you are refinancing a fixed rate home loan and you are still within the fixed period, you may be subject to a 'break cost'. Most lenders will charge a discharge fee when the loan is closed. These will be set out in the loan contract. If in doubt, call you current lender to find out the costs to pay off the loan
The new loan may have setup costs and there will be government charges to transfer and register the mortgage.
You will need to speak to your current lender as well as your new lender (if you are planning to switch lenders) about what fees are involved so that you can determine whether the fees will outweigh the savings. If you are refinancing to enjoy the savings of a lower interest rate, potentially the savings in the first year will be minimal if you deduct the changeover costs. It is usually after this first year that the benefits really start to kick in.
Regularly reviewing your home loan gives you the chance to keep up to date with the latest products and interest rates on offer. Finding a lender that understands what you are looking for and will take the time to explain the benefits can be a big help. State Custodians offers very competitive home loans, with a broad range of features and we have a team of Lending Specialists ready to answer any questions you have. Check out our home loans or call on 13 72 62 to chat to a lending specialists about refinancing.