In the face of declining interest rates, many Australians have mortgages that are simply uncompetitive in today’s market. Some have also experienced changes in their own financial situation and want to take advantage of lower mortgage repayments.
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So what is the solution?
Refinancing is an effective way to lower your repayments - if you do your due diligence. In other words, the benefits of refinancing must always outweigh the costs.
Following are five things you should consider before refinancing your home.
There will inevitably be costs associated with shifting from one home loan to another. Discharge fees, valuation fees, application fees, and break costs can leave you questioning the decision to refinance in the first place. In some cases, you may even have to pay stamp duty.
Most have a natural tendency to skim read terms and conditions, but taking the time to go through them properly is well worth the effort. At the very least, compare repayment savings on your lower interest rate with the total cost of refinancing. This will give you an idea of how long it will take you to recover the cost of switching lenders.
2. Your credit rating
If you can’t remember the last time you looked at your credit rating, then now is the time to obtain a copy of your credit report. Why? Because you must understand your financial credentials before applying for refinancing.
The perhaps obvious rules of maintaining your credit rating still apply. Ensure that you don’t default on any loans or bills, and always make repayments on time. A less obvious point here is that refinancing is recorded on your report as a credit application. Resist the temptation to refinance often, as this can affect your ability to attain a lower interest rate in future.
3. Property value and equity
Equity can be calculated by subtracting the balance owing on your loan from the total value of your property. This, in turn, gives your loan-to-value (LVR) ratio. For example, if 60% of the value of your home is mortgaged, then your equity is 40%.
In the context of refinancing, equity acts like the deposit you had to pay when you first purchased your property. If you apply for refinancing with less than 20% equity, then you may have to pay Lenders Mortgage Insurance (LMI). Equity may of course rise and fall in line with the value of your home, so it pays to know what your home is actually worth.
4. Current interest rates
When assessing interest rates, it’s important to understand the factors that influence them most. One of the most influential is the official cash rate, set by the Reserve Bank of Australia (RBA). Mortgage rates tend to mirror movement in the official cash rate.
With that said, COVID-19 has accelerated a general downward trend in the official cash rate to record levels. Refinancing to a lower variable rate may allow you to take advantage of this general trend. But with rates so low, there is always the potential that they may increase in future. If this is the case, consider refinancing with a fixed rate. As always, awareness of current trends will help you make the best decision for your unique circumstances.
5. Refinancing with your current lender
Although it may be tempting to shop around, it’s worth asking your current lender whether they can offer a more competitive rate. Lenders understand that it is more cost-effective for them to retain existing customers than it is to recruit new ones.
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Indeed, many employ staff for the sole purpose of customer retention – so you could do a lot worse than pick up the phone and negotiate a better deal. If you do succeed this way, it’s also likely to be cheaper. A switching fee may be charged when refinancing with the same lender, but you will not have to meet some of the other costs mentioned earlier in this article.
Refinancing can be an effective way to lower your interest rate if it is done correctly. However, the potential dangers of refinancing lie in ignorance of the facts. You must understand interest rate trends and the broader economic climate. You must also understand your credit score and how your current property value affects your equity and thus your capacity to refinance.
In any case, it may be helpful to talk to your current lender to negotiate a better deal. Ultimately, they want to retain you as a customer and you may save money by staying them in the process.
About HSD Finance
HSD Finance is a full-service mortgage broker based in Sydney and serving Australia wide, we are here to assist with customers in all financial needs. If you would like to know more about how HSD Finance can support you, please get in touch with the support team on 1300 311 123 or firstname.lastname@example.org
The views and opinions expressed on this blog are solely the views of the original author and other contributors or sources. These opinions and views do not necessarily represent those of HSD Finance, and/or any/all contributors to the site.