Home loans: What Is Refinancing And Should You Do It?

It often pays to take a look at certain everyday costs to see if you can get a better deal. Items such as utility costs, insurances, food and even your mortgage can and should be scrutinised for better deals. These costs can creep up and over time, can add dollars to your cost of living.

Refinancing is the process of taking out a new mortgage on your property – but it pays to know the benefits and drawback before you undertake such a change. Unlike switching your electricity supplier, you need to be crystal clear about why you should refinance your mortgage and how you should go about doing it.

Why Refinance?

Refinancing can help you secure a better deal on your mortgage, consolidate your debts or unlock equity in your current property depending on the options you take. When refinancing, you’ll need to make the decision to increase or decrease your debt or keep it the same. This is dependent on your reasons for refinancing.

Loan increases generally help you to consolidate your debts, such as a credit card debt or car repayments. As home loans incur a lower interest rate, you might find that your repayments are smaller, easily handled amounts each month. This is also true if you want to undertake a renovation. Refinancing can allow you to redraw of payments or take out a new loan with the amount you need.

Decreasing a loan may allow you to reduce the term of your current loan, lessen your monthly repayments or secure a lower interest rate. Even a slight reduction can save you tens of thousands of dollars over a 20 year period.

You can opt for keeping your loan at the same level of repayments. However securing a lower interest rate can help pay off your mortgage sooner. If you decide this is your aim, look for removing extra facilities you don’t need. You might find you can use your improved credit score to secure a better interest rate. A better option for you might be to move from a variable loan, to a split loan, or vice versa to take advantage of market conditions.

After you’ve understood the reason for refinancing, you’ll then be able to look at options and features such as interest rates, fee structure, the ability to pay off your loan sooner, ability to offset your savings or to package all of your costs (credit card, insurances) into one loan.


Fees And Charges

Refinancing may lead to extra fees and charges you’re not aware of from both your old and new lender. You may incur the fees and charges from an old lender, but you might find you can negotiate with your new lender to waive the fees that might normally occur. There is high competition between lenders, and so a new lender may make it as enticing as possible for you to choose them.

Property Revalue

A new lender will often require a property evaluation if you are refinancing your loan. Your loan-to-value (LVR) ratio may increase if the valuation of your property has decreased. This may affect the money a lender is willing to offer. If your equity has lowered, you may be up for lenders mortgage insurance (LMI) which can add thousands to your new mortgage. If the LVR is too high, a lender may not offer you a loan at all.

Your Financial Position

It’s a good idea to look at your personal financial position when considering refinancing. Your life may have changed significantly since you first took out your mortgage – new job, new baby, one income per couple, any new loans you’ve taken out. These are occurrences that a new lender will need to take into consideration.

The Cash Rate

The Reserve Bank of Australia (RBA) announces the cash rate on the first Tuesday of the month. The cash rate guides lenders to determine their variable interest rates. Lenders may or may not pass on changes to their customers. Keep track of the cash rate and how well a potential lender passes on changes to its customers. You might find you can take more of a risk with a fast moving lender to take maximum advantage of rate decreases while weighing up if you can afford potential rate increases. Tracking the cash rate and how your potential lender responds could assist in the selection of a good refinancing option.

Pro Lender Tip: Once you’ve done your homework, it will pay to have a chat with your current lender to see how flexible they can be. You might find they’re willing to offer what you’re looking for if they want to keep your business, and you won’t incur extra potential fees and charges if you change.

Fixed Loan Period

For many, refinancing will occur at the end of a standing fixed loan period. Generally, breaking a fix loan period can be costly, but you might find a better deal once it has ended and you can renegotiate. Shop around when the time is drawing to an end and do your homework so you can understand your options.

A fixed loan generally reverts to the variable loan offered by your lender, which may or may not be a better option for you. There’s also no guarantee that this rate is the most competitive. This is also a great time to look for features you may have found you’ve needed and can now work into a new loan.

Pro Loan Tip: Check the terms and conditions with your current lender and see how costs may vary with another lender. Compare home loans to see if you can get a better deal. A broker will be able to help you compare and send you any documentation you may need. Unlike banks, lenders have several options available and can take into consideration your needs when looking at options.

When it comes to home loans, ITP have qualified mortgage brokers to help you choose a mortgage based on your needs. ITP offer home loans for new homes, investment loans, refinancing options and renovation loans. They can help you with offset accounts and redraw facilities that could potentially save you thousands over the long term. Phone 1800 367 487 and chat with a friendly ITP mortgage broker today. Check out our web link for more information