Refinancing Your Mortgage: Do’s and Don’ts explained

Australia is amidst the fastest run up in interest rates since 1994. We are also being faced with the compounded pain of inflation. Naturally, homeowners are casting a laser beam glance in the direction of their greatest monthly expense – their mortgage.

According to the Australian Bureau of Statistics, 14 billion dollars’ worth of home loans were placed with a new lender in August alone! The Property Exchange Australia’s (PEXA) first consumer report into refinancing sentiment and behaviours reports that in the past 12 months, more than 1 million Australians refinanced their home loan, saving an estimated $1,524 per year on average.

The savings are tempting. But if you are considering refinancing your mortgage, before you rush in, there are a few things to be aware of.

First though, let’s look at the basic fundamentals of what refinancing is and why people do it.
 

WHAT IS REFINANCING? 

Put simply, refinancing your mortgage is the process of taking out a new home loan under a different term and interest rate to repay your existing home loan in the hopes of achieving a better deal in the process.

Some benefits of a successful refinance include:

• Accessing equity or restructuring your finances

Refinancing can allow you to increase your mortgage and cash in on some of your home’s equity. This could be part of a wider investment portfolio strategy to purchase more property. Or, you may decide to refinance as a way to cut down other debt. Home loan rates are lower than those of credit cards, which can mean less interest owing each month. Having one repayment rather than multiple can also make things simple and provide some much-welcomed administrative relief!

• A reduction in your interest rate

The number one reason most homeowners consider refinancing is to secure a lower interest rate. If interest rates have dropped since you first obtained your mortgage, refinancing can provide you with a more competitive rate. Moving to a more competitive rate can mean reduced monthly repayments for a decrease in short term financial stress and the ability to focus on other savings goals. For example, let’s pretend a homeowner named Mary has a $250,000 home loan with a rate of 6.0%. Mary does some research and decides to refinance with another bank who is only charging an interest rate of 5.75%. In making the switch, Mary could trim the total interest paid by as much as $11,400 over the duration of the loan (if the new loan term is written over the same period as the prior loan).

• Shorten the term of your loan

A change in life circumstances such as a new job or easing of other financial obligations can put you in a better financial position than when you initially took out your loan. If that is the case, you might want to explore refinancing to pay your loan off more quickly and shorten the overall term. Your monthly repayments may increase, but you could shave years off your loan.

Now it is not as simple as waving a magic refinancing wand and automatically receiving a bundle of savings. There are a lot of factors to consider to ensure you maximise your savings and avoid potential pitfalls.
 

THE DO’S OF REFINANCING YOUR MORTGAGE 

• DO determine why you want to refinance

From better interest rates to lower fees, there are many reasons why you might want to refinance your home loan. Determining this and understanding why you are unsatisfied with your current loan will put you in the best position to narrow down your options and select a new loan that is ideal for your specific situation.

• DO get your finances in order first

Just because you have been approved for a home loan before, doesn’t mean you will be automatically approved now. Your new lender will want a crystal-clear picture of your current financial situation. Before proceeding, consider if your finances are in good shape. Is your source of income regular? Have you got a healthy repayment history? Do you have a solid budget? Displaying evidence of solid money management could not only improve your chances of approval – it could also help you secure a more competitive interest rate once approved.

• DO crunch the numbers

There is no point refinancing if it isn’t going to save you money in the long term. It is vital to understand all the costs involved in leaving your current lender and in securing a new home loan. You can then decide if the savings of refinancing outweigh the costs.

First, investigate all the terms of your current loan. How much time is left until you finish repaying? How long since you last refinanced? What is the current interest rate? What additional features are you receiving?

Then make sure you explore everything involved in transitioning to your new loan. Refinancing can involve a range of costs depending on which lender you go with.

• DO your research

Mortgage holders spend six weeks on average researching options. Look critically at each home loan product. Do your homework before you apply to reap the most rewards. Remember interest rates vary among lenders and even a mere .1 of a percentage reduction could make a big difference to your mortgage.

• DO speak with your current lender

The PEXA Refinancer Sentiment Research Report suggests that there are considerably more savings to be made by switching lenders. However, 55% of recent refinances chose to remain with their existing lender. Should you stay or switch? That depends, but it pays to have an informed discussion with your current lender to see if they can meet your requirements. If your existing lender can provide a competitive rate, it can save you plenty of time, hassle, costs, and risks of switching.

• DO seek professional advice

There is no one size fits all answer. An independent adviser can assist you in navigating the refinancing process objectively and help you find the most suitable product to meet your financial goals.
 

THE DON’TS OF REFINANCING 

• DON’T forget the fees

It is natural to assume refinancing will automatically save you money, but this is not always the case. As mentioned previously, there are several fees involved that you need to be across.

Discharge fee: Your existing lender will charge you a fee to break your current loan contract.

New application fee: Your new lender may charge a fee for paperwork. However, to help secure your business, some won’t charge anything. Keep this in mind when negotiating!

Mortgage registration fees: This is a state government fee to register a new mortgage. It is typically around $100.

Insurance fee: If you want to refinance but need to borrow over 80% of the property’s value, there is a chance that you will have to pay Lender’s Mortgage Insurance. This can be particularly devastating if the original lender also charged you Lenders Mortgage Insurance.

Remember, competition for mortgagees is hot right now. Banks are going above and beyond to lure new customers and maintain existing customers. Many of the above fees are up for negotiation.

• DON’T be lured by special offers and honeymoon rates

Lenders commonly offer honeymoon rates to attract new clients. Whilst these rates are very alluring – they are designed to be that way! Make sure they aren’t the sole reason you want to refinance. It could end up costing you. These honeymoon rates are often very low for the first couple of years, but then return to a less competitive (and sometimes higher) rate. Read the terms and conditions thoroughly, seek professional support and don’t be distracted and enchanted by the bells and whistles – consider the home loan product in its entirety.

• DON’T send in multiple home loan applications to different lenders

It is important to explore and compare different lenders. However, sending in several applications can mean sending a copy of your credit report each time. Each request will leave a hit on your file. Future lenders will not know if you were declined or just changed your mind. This can have a negative effect on your borrowing power. The best option? Conduct your comparisons wholeheartedly but submit only one application with the lender that you want to proceed with.

THE MORAL OF THE STORY WHEN IT COMES TO REFINANCING 

Refinancing is going to be a hot topic for months to come as interest rates continue to increase and banks become more competitive with what is on offer.

With this in mind, it’s important to remember that while refinancing your mortgage can be a stellar financial move for homeowners, not every refinance makes sense.

It pays to evaluate your own unique situation thoroughly. There is effort, cost and paperwork involved in refinancing. Do your research and make an informed decision that will truly benefit your overall position and excel your pathway in achieving long-term wealth.

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