Should I stick with my current home loan or refinance?
Before even considering switching away from your current home loan it’s important to understand what refinancing is and how it works. Refinancing is the process of swapping out your current loan for a new one, often at a lower rate. Essentially you take out a new loan which pays off your existing loan(s), leaving you with just the new loan.
Whilst there is no concrete rule you can follow to decide if you should refinance, broker Michael Ching provides a pretty good starting point “a mortgage is not a set and forget product. If you are on a home loan with an interest rate that begins with a 4, you are probably paying too much.” Through the use of refinancing there is often a wealth of savings to be made, we suggest reading through our guide to get a better understanding and see if its time you gave it some consideration.
When is it time to refinance?
When there are more competitive rates on the market.
Paying the same amount each month at a lower rate means you could be paying off your mortgage sooner without paying anything extra as less of your payment is devoted to interest.
Almost one in four Australians believe refinancing is a good idea for saving money on your mortgage but state they can’t find a more competitive rate. Which is interesting when you consider a recent study by UBank found that nearly 85% of respondents couldn’t accurately recall their home loan rate (up from 84% in 2016).
By actively monitoring and seeking out competitive rates you could save yourself thousands. It only took a few clicks for Loan Dolphin customer Mike Israel to save $10,000. Mike was paying 5.17% with St George but was easily able to refinance with a rate under 4% and save $10,000 on a $220,000 loan. Learn more about Mike’s story
You want the cash to make a large purchase.
Often people look to leverage the equity in their house to extend their loans and use that cash injection to make large purchases. Common purchases made through refinancing include renovations, your child’s education, deposits on your next home or an investment property and investing shares or other opportunities.
The amount you may be able to access through refinancing depends on the difference between the market value of your property and the remainder of your loan. This amount can be affected by y
You have other debts you wish to consolidate
Whether it be your car repayment loan or rising credit card debt, debt repayments for personal loans may become unmanageable due to their high interest rates and unfavourable terms. If you find yourself struggling to meet payment deadlines for each individual loan it could be in your best interest to consolidate all of your debts into one.
By refinancing your home loan, you can pay out your personal debts and be left with a single repayment at a potentially lower rate. Whilst, at first glance rate discrepancies of 10%+ can make consolidation very appealing, it is important to look at the terms of your loan. For example, consolidating a 5-year loan at 15% and into your home loan at 4% may seem like the logical option. However, spreading that repayment over 30 years could mean you are left paying far more interest than you would have with your original 5-year loan.
When is it not time to refinance?
54% of Australians say that their current financial situation worries them. An additional 33% constantly worry about their future. Refinancing may seem like it can offer savings in the long run and provide a low interest cash injection in the short run however home loaners need to be wary. Not paying attention to terms and conditions and a failure to plan your refinance properly can actually cost you money adding to your financial stress.
You have bad credit
Your credit may have taken a turn for the worse since your last loan or perhaps it wasn’t so great to start. Regardless refinancing with a bad credit score will mean you won’t get a competitive rate and you will end up paying overs on your interest. Your credit rating is out of 1200 and anything below 509 is considered below average and can be deemed “bad credit”.
Prepayment penalties and miscellaneous fees
Perhaps one of the most important points to consider, how much is it going to cost you to leave your current home loan and enter your new home loan. Since 2011, there has been a ban on exit fees for variable rate home loans, however if your loan is from before 2011 you may still have to pay. Exit fee costs are traditionally 3-5% of the loan, which can be thousands of dollars, so it is definitely something you will want to consult your lender about.
Whilst exit fees have been banned the Big 4 still have legitimate administrative fees in place, a list of such fees can be seen below:
- CBA charges $350 for Settlement Fee (Discharge)
- Westpac charges $350 for Discharge Costs
- NAB charges $350 in Mortgage Discharge Fees and then $150 for Production of Documents (which permits registration from other parties)
- ANZ charges $200 if there is not change to the borrower and $350 if there is a change
You are planning on moving soon after
Want to refinance but you also plan on moving house in the near future? It is probably best to think again. This tactic could see you paying two sets of closing fees and any loan repayment savings you may have been able to leverage would be lost in the short term.
You do not have a fixed source of income
It is important to consider whether or not you are going to have the income to pay off a long-term debt. Are you willing and ready to be working an additional 30 years from the time of the loan to make your repayments? Ensuring you have a reliable source of income is an important precursor to entering into any loan agreement.
Cashing out with your equity may seem like a good idea at the time but it can be dangerous, especially when your income may not be guaranteed. By relinquishing equity in your home back to the bank you open yourself up to the possibility that the bank may take your home if you are unable to make loan repayments.
What to do next
- Evaluate the Costs
First you will need to find out the exit fees or penalties payable to your current lender, as well as any other costs associated with the loan. The fees will vary for each lender (we have listed a few above) so a good place to start is the Terms and Conditions of your current home loan contract.
When evaluating the costs, you will also need to determine what the cost is of establishing your new home loan. You will need to work out how much you will need to borrow for your new loan, and don’t forget to factor in renovations, debt consolidation and any other expenses from your new lender.
- Figure out the ‘why’…
Before deciding on a new loan, it is important to figure out why you are looking to refinance. We have listed a range of reasons ‘why’ you may want to refinance in the beginning of this guide. Whatever the reason, it’s important to be aware of the ‘why’ so you can make an informed decision and choose the loan that is right for you.
- Choosing the right loan.
Once you have figured out your top reasons to refinance, you can now find a loan that ticks all your boxes. Make a list of the features that matter most to you and keep these in mind when choosing your new loan. Filtering lenders based on their list of features is available to you when using LoanDolphin to refinance your loan. Home loans are a long-term commitment and the costs associated with chopping and changing means you want to ensure get the right loan.
- Apply to refinance
Once you have figured out the associated costs, figured out the ‘why’ and decided on the features you are looking for in your next home loan.It is now time to refinance your loan. This is where LoanDolphin comes in… you can connect with experienced lenders and brokers to ensure you are getting great service and not wasting any time talking to different lenders or worrying if you’re getting the best rate and loan possible. All you have to do is fill out one simple form in 5 minutes and you have access to hundreds of lenders who compete for your business. LoanDolphin even works with the big 4 banks.
Once you have filled out the form, our lenders and brokers will bid for your loan. Yes, they bid for your loan rather than making you do hours of research. This means you get their best offer, often with rates you won’t find elsewhere. If you are able to post your details during business hours you can even receive bids within minutes.
Congratulations you now have a new home loan. Plus, you probably saved hours of time and thousands of dollars in the process. You will now receive all the information you need to manage your new loan, which includes your new account information.After settlement, your new lender will “draw down” on your loan. This is when your lender will pay off your current home loan using the funds from the new loan.