Pros and Cons of Refinancing your Home Loan

Many borrowers are not even aware of what their current rate of interest is on their home loan, let alone whether it is competitive to what’s available in the market. But before you consider whether you should test the market, it is critical to know the ins and outs of refinancing your home loan to another lender.

Thanks to the internet, it is now easier than ever for people to shop around for a good deal on their home loan. Unlike the ‘olden days’ when it seemed like borrowers were stuck with one lender for their entire loan term, it is now very common for people to refinance their mortgage with a different bank or lender.

What is refinancing?

Refinancing is a term used to describe the changeover of a mortgage to a different organisation or account. It is often done when there are appealing benefits such as a lower interest rate, more flexible loan terms or debt consolidation requirements.

There are two main types of home loan refinance:

  • When you move your loan to another financial lender, it is called an external refinance.
  • When you refinance your home loan with your existing lender, it’s known as an internal refinance.

Like any financial product, refinancing does not suit every borrower. We have compiled a list of some of the pros and cons involved in refinancing your home loan.

Pros and cons of home loan refinancing

Pros:

  1. Interest rate: one of the main reasons that people refinance is because they want a lower interest rate. Having a lower rate can not only reduce your monthly repayments, but potentially help you pay your loan off sooner and boost your savings long term.
  2. Equity Access: when you refinance your home loan, you will have access to any equity you have paid over the course of your mortgage. If you choose, this could be used for things like re-investing, renovations, taking a holiday, purchasing a new car and much more. However, before you go spending too much of your equity, it’s important to remember that the more equity you have, the better chance you have of getting the very best interest rate you can achieve from your new lender.
  3. Flexibility: when you refinance your home loan, you can lengthen or shorten the loan term (i.e. how many years it takes to pay off the loan) to suit your needs. By increasing your loan term, you can reduce your regular payments over a longer period of time. In comparison, by decreasing your loan term, you may increase your payments but pay less interest overall (by paying off the loan quicker).

Cons:

  1. Fees: It’s important to do your research before you consider refinancing as there can be a number of fees involved. A few of these include exit fees, valuation fees, application fees, and break fees.
  2. LMI: If your equity is less than 20% of the property value, your lender may require you to take out Lenders Mortgage Insurance (LMI). This protects the lender if you default on your home loan, but could end up putting you seriously out of pocket.
  3. Credit Score: Most people don’t realise that every application for credit goes into their personal credit file. Refinancing your home loan often could impact your credit score which can make it difficult to receive lower interest rates for future applications.

It’s never too early

If you’re thinking about refinancing but have only just taken out a mortgage, it is still possible for you to do so. In fact, anecdotal evidence coming out of our sister company Loans.com.au’s lending specialist team suggests that it is not uncommon at all for people to refinance their home loans within 3 months of buying their property! This makes sense if you think about it. Buying a home for most people really focuses on just that – the home or property. Very rarely does it involve spending more time (than looking for the right home) on finding the right home loan!

Ultimately, refinancing is not going to suit every person in every situation. It is important to look at your individual circumstances and weighing up all of the pros and cons before making a move to do so.

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Five Reasons Why Having a Loan Approval in Place is Important

There’s no point wasting your time searching for or getting emotionally attached to a property if you can’t make an offer on it.

It’s a sunny Saturday, and you’re prepping for a spot of house shopping. You’ve got a shortlist of properties to see, an inspection checklist, your significant other, and a strong coffee. But, have you got your finance sorted out?

Before you start doing any inspections, you need to get a loan approval. Here’s why:

1. You know you can get a loan

There is no point doing open house inspections and getting excited about a property if you have no assurances that a bank will lend you money to buy it. Get approval before you waste any Saturdays.

2. You can be more choosy

You must compare home loans to get the best deal. While the interest rate is important, you need to consider the entire cost of having a loan, and any discounts you can get on your banking. Organising pre-approval gives you time to shop around for the best home loan for you.

3. Have realistic price expectations

It’s all well and good to use a home loan calculator at home, but until you have pre-approval, you have no idea how much you can actually borrow. Getting pre-approval means you don’t waste time on properties that you just cannot afford.

4. You are ready to buy

When you find the right property, you need to move fast for two reasons. It ensures no one else gets a chance to buy it before you, and gives you a bit of bargaining power. Being able to move ahead quickly will entice some buyers and can use this to negotiate the price lower. Loan approvals in Australia take time, so don’t leave it until you’re negotiating.

5. It makes the negotiations process less stressful

There will be a million things to think about and do when negotiating for a property. The last thing you want is to be chasing a payslip from five months ago to give to a bank. If you have a pre-approval, you just call the bank and provide them with the address and sale price. No stress.

So, before you spend hours poring over real estate listings or plodding around open houses get yourself a pre-approval. It will save you stress, time and money.

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Why some Young Australians are Buying an Investment Property as their First Home

According to the NAB Residential Property Survey released in 2016, there is an increasing number of young, first-time Australian buyers of investment property. It was found that for the third quarter of that year, first-home investors account for 12.2 percent of all new property sales which is higher compared to the 11.1 percent posted in the second quarter.

Why do some young Australians prefer investment property? The survey shows that first-time investors like flexibility. They can invest in property in other locations which offer lower rates, while at the same time, rent in the city.

It’s never too young to join the investment property bandwagon, but before entering the real estate market, there are various things to take into account so you can get the most out of your chosen investment and minimise risks.

Know the ins and outs of real estate and property investing

Buying an investment property is a major decision, that’s why it is important to educate yourself on how the market works. It costs a lot of money and if you’re not knowledgeable enough, you may end up paying more than you should. But don’t worry. There are a lot of resources online that cover what investors need to know.

Seek professional advice

Aside from educating yourself with online resources on real estate and investing, you can seek advice of qualified professionals. Obviously, they understand the market better, so they can give you helpful insights on home loan comparison, investment strategy, and borrowing capacity.

Save early

One common mistake of those who want to venture into property investing is that they fail to save as early as possible. Young Australians can take advantage of time. This is one great asset since savings have a lot more time to grow. Save early and make saving a habit. Eventually, you’ll have enough disposable income to buy investment property.

Compare home loans

In a competitive market such as investment loans, it pays to have a better understanding of mortgage products. To lower your repayments, you can look for features such as lower ongoing fees, offset account, and a redraw facility. It is likewise essential to compare mortgage rates and choose what suits your needs and financial situation.

Use a home loan calculator

This is a great tool to compare home loans and have a better idea of how much an investment property would cost. There is also a home loan repayment calculator that you can use to get the minimum monthly repayments and interest paid.

Got other tips on how to compare mortgage rates and home loans? You can share your ideas in the comments section.

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