With interest rates continuing to increase, mortgage refinancing remains an attractive option for many Australians.
The good news is that it’s becoming much easier to refinance your mortgage. Banks are no longer permitted to use exit fees (if you took up your loan after 1 July 2011) and over the past few years the processes for refinancing have been streamlined. Some credit providers are even offering to cover the cost of exit fees for those customers whose loan dates before the exit fee ban.
If you have been thinking about looking for a better deal, here are some things to consider before diving in.
1. Avoid the 30 year drag
If you can reduce the length of the loan period you will end up paying less in interest. But often when people refinance their current home loan, by default the duration can be stretched out for another 25-30 years. To avoid this, always find out if you can reduce the length of your loan.
The results can be pretty staggering. If you refinanced an $800,000 loan at 3.50% for 25 years, rather than 30 years, you could potentially save $92,000. But if you went for a 20 year loan the savings could be $180,000
2. Investigate the comparison rate
When you are refinancing it’s important to compare the comparison rate, rather than the standard quoted rate. Comparison rates are helpful as they understand the true cost of a home loan and this rate will include the relevant fees and charges related to that particular mortgage product. Don’t forget that lenders are obliged to provide a comparison rate.
3. Know your refinancing “why”
Before refinancing your home loan, you must consider why you are doing it. When I worked in a bank, some customers approached me to refinance their home loan for the sake of refinancing – this is not always enough of a reason.
Some great motivations for refinancing are:
- Needing to access equity from your current property for renovations or to grow your wealth portfolio
- Striving for a better home loan rate that saves money and enables you to pay off the balance faster
- Your circumstances have changed and you need more features such as an offset account, redrawing facility or the ability to make extra repayments.
4. Stay strong
Starting the refinancing process will no doubt trigger your bank to want to retain your business, and they’ll often offer you a rate discount on your existing loan. This tactic really bothers me, and I always wonder why the lender didn’t approach a loyal customer with a discounted rate before they made plans to leave.
After all, a consumer who had been on a rate of 4% for a $800,000 mortgage and could have had access to a rate of 3.70% sooner, would end up paying $39,000 less over a 25 year term.