Home Loan Refinancing

Mortgage refinance 

Mortgage refinance 

For the average Australian home-owner, the family home is the most significant asset you own and your mortgage is your most significant debt. Refinancing can sometimes result in major savings. 

How it Works 

Refinancing means taking out a new mortgage. You then use some or all of the funds to pay out your existing home loan. The new loan may come from the same lender, on different terms, or from a different lender.  

Advantages of Refinancing 

A common reason for refinancing is to take advantage of a lower interest rate offer.  

Refinancing may position you to consolidate other debts into a single lower interest home loan. If you are looking at refinancing, consider borrowing enough to pay out any credit card debts and personal loans. Home loan interest rates may be less than half the rate you are paying on these debts. 

By refinancing, you can often access extra cash to fund home renovations, study, a holiday, a new car, etc. You might want to refinance to give you access to funds for investment. If you have substantial equity in your current property, refinancing can provide money for the deposit to start building an investment portfolio. Or you may want to refinance to invest in a business enterprise.  

Home Loan Refinacing Here

Refinancing Costs 

As well as application fees, financiers often charge handling fees and settlement fees. There may be valuation fee to assess the value of your property. There will be Government registration fees to register your new mortgage, a fee to discharge your old mortgage.  

If you are increasing the amount of your loan to provide extra cash or consolidate other debts, you might find that your new loan exceeds 80% of the value of your property. Lenders mortgage insurance is then payable.  

Depending on the terms of your loan and your lender's policy, you might even incur a heavy penalty for paying out your existing home loan early. 

Other Traps to Watch for 

Refinancing can have many advantages, but there are usually costs involved in loan switching, so you need to do your sums carefully to be sure refinancing will result in savings. Happily, many financiers will waive application fees and make other concessions just to win your business. Be aware, though, that things change. The loan that is today a half percentage point cheaper than your current mortgage might next year be half a percentage point higher. Financiers who charge no transaction fees may reserve the right, in the mortgage agreement, to change their rules and impose fees.   

Getting the Best Deal 

The range of mortgage finance products available in the market is huge, and the features of different loan packages can be difficult to understand. There are specialist brokers who will source the best mortgage deal for you and arrange refinancing. Typically, they are paid by commission from the financier, so their services cost you nothing. Be careful, though, to select a reputable broker.  

Before seriously considering refinancing, it is wise to talk to your existing lender. Investigate the benefits of various refinancing options, then go to your lender and explain what you can gain from refinancing with a competitor. Often, lenders will offer to restructure your loan to match the benefits a competitor is offering. It might surprise you what your current lender is willing to do to keep your business.  

Loan Features 

The interest rate is usually the first consideration when selecting a home loan, but published information can be misleading. Is the rate fixed or variable? A fixed rate will remain constant no matter what happens to the economy. A variable rate can go up and down with changes in the financial environment.  

What is the loan term? How much do you need to pay monthly? If your circumstances change, will you be able to keep up the payments? While you don't want to be unnecessarily pessimistic, it is important to think about how you will keep up payments if you suffer illness, become unemployed, suffer a salary reduction, or you lose a second income for a while because a spouse chooses to be a stay-at-home parent while children are small.  

How is interest calculated? Whether it is calculated daily or monthly and when it is compounded can make a big difference to the actual interest cost. Look for 'comparison' interest rates to help you compare rates accurately. 

Loan flexibility can be an important consideration. Are there penalties for early payout, paying lump sums to reduce the loan, or paying more than the required installment? If you get ahead with your payments, can you redraw on the loan?  

Some loans offer an 'offset' facility. That means that instead of earning interest on money in your savings account, that money is used to offset interest on your home loan. There are possible income tax advantages, and usually the interest rate on savings is much lower than that on home loans, so there can be major benefits in this arrangement. If your loan doesn't have a redraw facility, you can use an offset facility to reduce your interest costs while still keeping your cash available when needed. 

There is even a type of loan referred to as a 'line of credit'. Your loan operates a bit like a cheque account overdraft facility. You have a limit, and as long as you stay below that limit you can draw funds any time and repay any amount you choose, whenever you choose. Some borrowers arrange for their entire salary to be deposited to their line of credit account, then just draw as they need to. The interest savings can be huge, but never consider this type of loan unless you are a very disciplined money manager with excellent savings habits.

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