If you’ve been on the same home loan for a while, you may think it’s no longer right for you. It’s possible that you find yourself paying a higher interest rate than the market average, or you no longer need some home loan features you had considered necessary in the past. Alternately, you may have built some savings that you want to keep in an offset account to reduce your interest payments, but your current loan doesn’t offer the facility. If you find yourself in such a situation, you may consider refinancing your home loan to switch to a better deal that meets your requirements. But it’s worth knowing that refinancing your home loan is going to cost you some money, and there are several pitfalls to consider before making the switch.
What are the main reasons for refinancing a home loan?
Depending on your personal circumstances and goals, there can be several reasons for switching to another home loan deal, including:
- A lower interest rate or fees
- Access additional home loan features
- Consolidate debts
- Using your home equity for other financial goals
One of the main benefits of refinancing could be reducing your monthly repayments by switching to a lower interest rate. If your income has taken a hit in recent times or your family’s situation has changed, freeing up some money from your mortgage could make it easier to manage your day-to-day expenses.
However, it would help if you weighed the benefits and costs before you decide to switch home loans to make sure you are getting your money’s worth.
Refinancing traps to avoid
Refinancing may have several benefits for you, depending on your situation, but there are pitfalls you need to be aware of. Here are three things you should know before refinancing your home loan:
1. The cost of refinancing your home loan
There are various costs you’ll incur when you refinance your home loan. These include the loan application fee for setting up a new loan, break fee or exit fee (if you plan to exit a fixed-rate home loan), and Lenders Mortgage Insurance (LMI) if you borrow more than 80% of the property’s value.
If you are refinancing to boost your savings, it could help to weigh your expected costs and potential savings to see how long it will take to recoup the money. If the expenses you are likely to incur are on the higher side, which could be the case if you are required to pay for LMI, or you are exiting a fixed-rate home loan with a high break fee, you may want to reconsider your decision and wait it out until you can get a better deal.
2. The term of your home loan
Your home loan term can impact the size of your repayments and the interest you pay on your mortgage over time. If you cannot find a lower rate home loan, you might be tempted to refinance your home loan over a longer term to reduce your monthly repayments. However, refinancing to a longer term could increase your costs, as you’ll pay interest over an extended period. Even if you are switching to a lower rate home loan, try not to increase your loan term, as it could see you paying much more in interest charges over the life of the loan despite a lower interest rate.
3. Interest rates that are too good to be true
Several lenders offer low introductory rates to lure customers. But if you look closely, you may find a high revert rate hidden behind what looks like a great deal with a low introductory rate.
Revert rate refers to the interest rate you are required to pay on your home loan once the honeymoon period (another name for an introductory period with a low interest rate) ends. If this rate is much higher than the initial rate you signed up for, you can expect a sudden rise in your monthly repayments at the end of the introductory term, which could jeopardise your financial planning.
Is it worth refinancing your home loan?
Refinancing your home loan could help you save money or build more flexibility into your home loan. However, it may not be the right solution for you in some situations, such as when your credit score is low or you owe more than 80% of the property’s value, especially when you are refinancing to save money.
If you are feeling confused about the best way forward, you could consider speaking to a mortgage broker to understand your options in detail, including the pros and cons of refinancing your home loan. Often, it’s much easier to negotiate a better deal with your current lender than switching to another lender. A broker can take over the negotiations on your behalf, using their knowledge and industry expertise to increase your chances of landing a better deal while also helping you find competitive offers from other lenders if you decide to switch.
