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
- 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.
- 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.
- 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).
- 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.
- 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.
- 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.Read More →