The facts and myths of refinancing your home loan
2nd November 2020 - Freya Cormack
By refinancing your home loan, you can save money and adjust your loan to work with your changing lifestyle. Refinancing can seem complicated, but it’s usually not. To help you navigate the process, we’ve outlined 5 facts and myths to do with refinancing.
1. FACT: You can refinance and stay with your current lender
One of the reasons why homeowners view refinancing as overwhelming is that they see it as switching lenders. While you absolutely can switch lenders, you may be able to refinance to a better deal with your existing lender.
And if you’re happy with your current bank but believe that you can get a better interest rate or more suitable loan terms, you likely can. See what interest rates your lender is offering to new customers.
If these new rates are lower, you can directly contact your bank and ask them to pass on a lower rate to you. Alternatively, a mortgage broker can negotiate on your behalf and may be able to do even more for you and your home loan.
Many lenders won’t require you to fully refinance in order to get a lower rate, so you could also save time and effort.
2. MYTH: Refinancing requires a lot of effort
Some homeowners delay refinancing because they perceive it as being time consuming and intimidating. However, most of the time it doesn’t have to be. If you don’t feel confident about refinancing, it might be best to use the services of a mortgage broker. Mortgage brokers won’t charge you anything and they’ll have expert knowledge of the process.
Before you go to a broker, you can even start comparing home loans online. You’ll find that there are dozens of rates and loan products available beyond what your current lender offers.
Related: When is refinancing worth it?
3. FACT: Refinancing should save you money
One of the main reasons people refinance is to save money. However, there are a range of costs involved, so it’s important to calculate whether your savings with a new mortgage will outweigh these costs.
Homeowners with a fixed rate mortgage need to look out for break costs. These costs are incurred when the borrower switches loans before the end of the fixed rate period. Since fixed periods usually only last between 1-5 years, it can sometimes make more sense to wait until the period ends.
If you are on a variable rate, you can refinance with a little more ease and flexibility. Try to think preemptively when selecting how your interest rate will be charged. Consider whether you prefer stability or flexibility.
Lenders Mortgage Insurance (LMI) may be charged when homeowners with less than 20% equity refinance. LMI can be costly, so it’s best to wait until your equity is higher before refinancing. Equity is the difference between your property’s current (up to date) value and your loan balance.
Other fees can include:
- Exit fees
- Mortgage transfer
- Legal fees
- Property valuation
- Application and establishment fees
- Loan maintenance costs
- Loan feature fees
4. MYTH: the only purpose of refinancing is to get a lower interest rate
Refinancing is definitely about more than just interest rates. While a lower interest rate can alter your lifestyle and increase cash flow, it shouldn’t be your sole focus. Other reasons to refinance might include:
- Debt consolidation
- Switching to a new lender
- Switching between a fixed and variable interest rate
- Changing your investment home loan to an owner-occupier loan (or vice versa)
- Your income or financial situation has changed
- You want to alter your loan repayment term
- Using your equity to fund a renovation or other large expense
- Dissatisfaction with your lender
5. FACT: it’s smart to regularly compare your rate and consider refinancing
It’s easy to get complacent with your home loan. You’ve got into the (good) habit of making your monthly repayments, but you’re forgetting to check for better deals. Interest rates go up and down frequently and a rate that was good 3 years ago might not be all that competitive today.
By being on the lookout for lower interest rates, you have the potential to save thousands and even get to a point where you can pay off your mortgage faster. Refinancing is less scary than you think, especially with the help of a mortgage broker.
While you shouldn’t rely on hopes that your bank will reward your loyalty, many banks will look at responsible, long-term borrowers favourably. If you have a history of making consistent loan repayments, you’ll have a greater chance of securing a lower interest rate with your current lender.
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The information in this post is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.
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*WARNING: This comparison rate is true only for the example given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. The comparison rates are based on a loan amount of $150,000 over a loan term of 25 years. Fees and charges apply. All applications are subject to assessment and lender approval. Quoted rate applies only to PAYG loans with LVR of 80% or less with security in non-remote areas. All applications are subject to assessment and lender approval.
^The estimated average future interest savings is calculated as at 15 April 2020 based on Lendi assisting customers into new loans with an average interest rate reduction of 0.89% for the 11 months prior, and assuming a median loan term of 26 years on both the old and new loan and all monthly principal and interest repayments will be made on time. Any future savings figures are estimated averages only, and do not take into account any product features or fees (including refinancing or break costs). Your savings will be different.