Refinancing a mortgage can be a great way to refresh your finances to better suit your current lifestyle.
To help make sure your refinancing experience goes as smoothly and painlessly as possible, RateCity has put the following tips together for your consideration:
Estimate how much you can save – will you REALLY be better off?
Many borrowers refinance their home loans in order to improve their financial situations, whether by lowering their interest rates, gaining the benefits of useful financial features, or putting the equity in their mortgage to good use.
But if you do some research and make a few calculations first, you may find that a refinance may not be the most ideal option in your current financial situation.
If you’re looking to refinance to a mortgage with a lower interest rate, it’s possible that refinancing could end up costing more than you expect. Even if your interest payments would be relatively low, you could find yourself stung by ongoing fees and/or switching charges, especially if you’re currently on a fixed rate mortgage and would have to pay break costs to leave it.
If you’re thinking of switching home loans to benefit from financial features such as offset accounts or a redraw facilities, you should check if there are any terms, conditions or other restrictions around using these features with the lenders you’re considering. You could find yourself unable to enjoy the full benefits of these features, or you may have to pay extra for the privilege.
If making use of your equity is your refinancing objective, try and work out whether your project will leave you better off. If you want to upgrade to a bigger and better home or investment property, or rent out your current property and buy a new one, do a few calculations to confirm that your plan is affordable. that you’ll be able to afford your new property. Even if on paper it looks like you’ll be approved for the refinance, that doesn’t mean your new situation will be easily affordable, especially if a surprise lifestyle change or an emergency leads to a sudden shift in your finances.
It makes sense on paper to base your home loan switch on numbers. The better your interest rates, the less you’ll need to pay, and the better off you’ll be.
But depending on your situation, the lender that should look the best on paper may not be the most ideal choice for your financial situation, due to aspects of their product or service offering that aren’t taken into account by even the most thorough of online comparison calculators (yet!).
For example, some of the lenders offering some of the lowest interest rates and fees are online-only lenders, who operate entirely electronically, without any branches or shopfronts where you can visit. If you’re not entirely confident about making loan applications over the internet, or if you’d appreciate having the option available to walk into a branch and sit down with a manager to talk though your loan, these lenders may not be the most ideal options for you.
Also, if you finance with one of the big banks or a similar lender, you may also be able to take out full refinancing packages, where your mortgage comes with access to savings and transaction accounts, credit cards, or other helpful options. You may find that these lenders offer more value for your money than some of the other options.
Could consolidating debt help your finances?
If you’re struggling to manage your finances from month to month, you may be considering refinancing your home loan onto a lower interest rate, and hopefully reducing your monthly loan repayments. But if you take a closer look at your budget, what if you find that it’s not so much your mortgage that’s causing your financial stress, but your other debts?
For example, if you owe money on a personal loan, a car loan, and a couple of credit cards, then you’ll have to make separate monthly repayments for each of these debts, as well as for your home loan. You’ll also have to pay interest separately for each of these debts, each one at a different (and often high) rate. If you combine the costs of all these debts, they can add up to a pretty penny.
In situations like this, it may be worth thinking about refinancing. Not necessarily to get a lower interest rate (though that wouldn’t hurt), but to consolidate your other debts into your mortgage. This not only simplifies your finances by swapping out your multiple repayments for just the one, but you’ll also only have to pay interest the once, at a rate that’s likely to be significantly lower than what you’d find on a credit cards or personal loan.
One important risk to watch out for when refinancing for debt consolidation is turning your short-term debts into long-term ones. While paying off a maxed-out credit card at a high rate of interest may be financially painful in the short term, adding this debt to your mortgage and paying it back at a lower rate over a 30-year term may ultimately result in you paying much more in total interest than if you’d kept the debts separate. Some lenders offer the option to split the balances in a consolidated mortgage, so you can pay off your property and your other debts separately, but at the same rate of interest. This can help to keep your finances under control without stretching out your repayments for too long.
Consider fixing your rate…
While switching to a home loan with a lower interest rate than your previous one is all well and good, some of the benefits of refinancing your mortgage can be lost if the RBA starts raising the cash rate, bringing up most standard variable interest rates with it. If you’re unlucky, it’s possible that multiple rate rises could leave your refinanced mortgage right back where it started.
When refinancing, it may be worth finding out if your lender can fix your interest rate for a few years, so you can enjoy the benefits of these reduced repayments for a while, whether it’s to free up your money to use elsewhere, or even to pay extra onto your mortgage and get ahead on your repayment schedule.
Of course, this option may not be suitable for every borrower. Fixed rate mortgages can sometimes be less flexible than those with variable rates, so fixing your rate could mean missing out on some of the flexible financial features that you might find valuable.
…but beware of Honeymoon Rates!
Some lenders may try to attract your business by offering a very tempting heavily-discounted interest rate if you choose to refinance your mortgage with them. The rate may even be fixed for a period after your switch, so you can keep enjoying its benefits for longer.
However, in some cases, when the fixed period ends on these super-low introductory rates, they’ll shoot up significantly, often to the lender’s standard variable interest rate, leaving once-confident borrowers now struggling to reorganise their budgets.
These enticing low introductory rates are sometimes known as Honeymoon Rates, as they’re a great way to start your long-term commitment, but they don’t last forever.
To sidestep the worst effects of Honeymoon Rates, check your lender’s terms and conditions before signing on the dotted line, and plan your budget in advance to calculate whether you’d still be able to afford your home loan in the event of a sudden sharp rate rise.