In essence, refinancing is getting a new loan to replace your current mortgage, which could lead to lower interest rates and help you improve your finances.
Here’s a handy guide on refinancing to help you understand the choices you’ll need to make. Refinancing could help to:
Reduce your monthly repayment
Paying a lower interest rate than your initial mortgage could save you thousands. The first step is knowing the rate you’re paying at the moment and compare it against rates of other lenders. If you’re coming to the end of a term with a fixed rate, it’s a good time to see if you can find a better option with lower interest rates or more flexibility.
While increasing your loan term can reduce monthly repayments, it’s good to be conscious of the total interest you’ll end up paying over the life of the loan.
Consolidate your repayments
The amount of credit you already have access to, even if you’re not using all of it, can affect how much you’re able to borrow. Lenders will add up the credit limits on all of them to gauge how much they are prepared to lend you. If you’ve taken out additional credit cards or loans since you first took out your home loan, it could affect the terms of your refinancing. Consider consolidating these debts into a personal loan before you apply. Not only will you get rid of those high credit card rates and fees, you will only need to make a single repayment each month, helping you manage your finances more efficiently.
Acquire better loan features
There are a variety of home loans you could apply for depending on the lender. Making a switch to a new loan could be an opportunity to change certain features to better suit you, such as the loan term, a fixed to variable interest rate, an offset account, or even a redraw facility. Consider what’s important to you. There are even lenders who offer a smooth online experience and great service. Not every borrower is the same, so be sure to look out for a loan features that would be the right fit for you.
On the other hand, here's what to look out for if you want to refinance:
Your total loan amount increases
Lenders often default to a term of 25 or 30 years which may be longer than your initial mortgage. If you want to keep to your current term, or you’re looking to pay your loan off more quickly and you can afford it, you should ask a new lender for the term you want.
Prepayment penalties may be high on your existing home loan
Depending on your current mortgage agreement, there might be early exit fees or break fees if you end your loan term early, as well as new set-up fees with the lender you’ll get your new loan from. However, often times the long-term savings and benefits from refinancing make up for the upfront costs, so be sure to do your research and weigh the various costs to ensure that you’re making the right choice for yourself.
If your credit history has taken a hit since your previous loan, it may make it less likely you’ll get a good rate. With new Comprehensive Credit Reporting being introduced, be sure to exercise positive behavior to help improve your credit score.
Your income situation has changed
If you don’t have a reliable source of income over the period of the loan, i.e. you’ve moved from PAYG to freelancing, refinancing can be more challenging. If you’re looking to get a home loan, it’s best to have three to four years of history at your current job.
Should I use a broker?
Refinancing your home loan is a lot to think about, and the benefit of working with a broker is that they will use their experience and market knowledge to find a home loan that is suits your needs – and do all the legwork for you. Bear in mind that your broker may be able to offer more tailored recommendations if you can share your personal financial information, such as evidence of income, expenses and other financial commitments.
Even if you wish to stay with your current lender, it may be worth speaking to a mortgage broker as they might be able to access a better deal for you.