What is refinancing?
In the simplest terms, refinancing means taking your home loan to a new lender. In doing that, most of your transaction accounts move to the new lender as well. Whether you’re after lower repayments, you want to tap into the equity sitting in your home, or you want to consolidate your debts, refinancing can offer a world of benefits. Here are some things to be aware of so that you don’t find yourself hooked into a bad deal. Refinancing done without due care and consideration can take you several steps back and extend your loan by decades.
First things first – Look at the terms of the new loan:
You must make sure that, when you make a move to the new lender, the new loan term remains at the remains the same as with your previous bank. A typical loan term is 30 years and, if you’re not careful, your new lender could re-set that loan term when you move your loan to them. That would essentially mean, every time you refinance you would be extending the loan term, making it a lifelong debt trap. With proper guidance, that doesn’t have to be the case!
Making the best of refinancing:
If the reason you want to refinance is not exclusively reducing your financial burden, you might want to maintain higher repayments with your new lender and pay off your debt sooner. In doing so, whatever savings you made by refinancing can go back to paying off the principal of your loan – you will pay off your loan faster and save years off the mortgage.
If you’re after a better deal:
Don’t be fooled by interests rates. Finding a lower interest rate doesn’t necessarily mean you’ve scored yourself a better deal. In fact, a product with more features may cost you more in fees or interest but could save you more in the long run. For example, including features such as an offset account will prove valuable as it will allow you to make larger repayments or use any extra cash to pay off the loan. Products without this feature may charge a fee for early repayments.
Honeymoon rates are just that…
Don’t be lured by offers with discounted introductory rates unless you’ve carefully calculated the savings over the lifetime of the loan. While a loan with a discounted interest rate can be tempting, 99% of the time it’s only temporary. Once the introductory period is over, the interest will revert to a higher standard variable for the rest of the loan term. It may be more financially beneficial to negotiate a lower interest rate without an introductory discount.
Be aware of the fees:
One of the main purposes of refinancing is to lighten your financial burden, however, that doesn’t mean that it’s not going to cost you. There are many fees involved, such as discharge and application fees, a valuation fee, land registration fee, and mortgage insurance. While these cannot be avoided, to make the process worthwhile, you have to ensure that the costs involved are not higher than the savings.
Consolidation of debt:
If you are consolidating your short-term debts, such as credit cards and personal loans, after refinancing, you must make sure to pay off your short-term debts (where you make extra payments for your loan) within the established timeframe. Otherwise, you will keep paying short-term debts over the life of your mortgage, wasting thousands more in interest payments.
Consult a broker for advice on the best actions to take:
Yes, there are many traps to avoid but a little help from experts can take the stress out of refinancing and help you save you thousands, fund that renovation you’re so excited about, or simply find a loan that suits you.
Call us to help you navigate this all-important process, avoid the traps, and become a mortgage-free homeowner earlier than you ever expected.