Looking to consolidate your loans? Feeling it’s time to renovate? Worried you’re paying too much interest? These are just a few of the factors that motivate people to explore their home loan options.
In this article, Paul Wright, Director of Choice Home Loans Wollongong, takes us through the ins and outs of refinancing your home loan.
What exactly is refinancing?
“Refinancing your home loan essentially means changing your home loan from one provider to another, usually to obtain a better outcome or a cost saving generally related to obtaining a lower interest rate,” explains Wright.
Staying with the same provider, known as internal refinancing, is also possible. However, if you’re staying with the same provider and just looking for a better interest rate, requesting a discount may be the better solution.
Why bother with refinancing?
ABS statistics show that a massive 234,956 home loans were refinanced in Australia in 2016, so it’s not an uncommon move to make.
Wright says that some clients have big reasons for refinancing their loans. These include getting access to equity to invest or renovate, restructuring to reflect a change from a family home to an investment property, establishing an offset account, or switching to a split fixed/variable rate loan. “Other times, people simply want a better deal after seeing lower interest rates on offer from other providers,” he adds.
Usually, there’s a trigger for clients looking to refinance, Wright advises. “And the trigger generally isn’t purely interest-rate driven, but often a change in circumstances.”
What to consider before making the switch?
Paul’s biggest tip is to get advice from an expert before refinancing. “Some people look purely at the rate that’s on offer when comparing loans. Rates are important, but I don’t think they’re the sole driver of why you should change providers or take out a certain home loan with a provider. You need to consider the whole package.”
Some of these “whole package” considerations include:
The discharge cost to get out of your existing mortgage, which may be a break cost potentially adding up to tens of thousands of dollars if you’ve got an existing fixed rate home loan.
The difficulty of changing all of your banking over to a new provider (though this may be a case of short-term pain for long-term gain).
The facilities the new lender can provide: Do they offer a branch network? Is ATM access widely available? Can you have multiple offset accounts?
How can you avoid the refinancing trap?
The biggest trap with refinancing is focusing on your weekly repayment obligations and neglecting the longer-term picture. Paul says that when people refinance they typically choose the maximum loan term of 30 years. So, instead of the 15 years you had left in your existing loan term, this may be doubled to 30 years when refinancing.
If you extend the life of the loan, it’s a good idea to make additional repayments. Or, if you’ve been paying higher repayments with your current provider at a higher interest rate, continuing those repayments where possible is another good idea.
Wright tells his clients to review their home loans every 12 months. “That doesn’t mean refinancing every 12 months,” he adds. “I’d generally suggest you stay with a provider for at least three years.”
When it is time to refinance, mortgage advisors are ready to help. “Our role is to make the process as smooth as possible,” says Wright. “It takes about four weeks from start to finish to refinance, and we’re there to hold your hand throughout the process.”
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