Interest rates have dropped once again but the rate on your home loan may no longer be competitive or perhaps you want to look at consolidating your debts — then it’s time to think about refinancing.
Latest figures from the Australian Bureau of Statistics show the number of refinancing commitments for owner-occupied housing rose 6.1 percent in December 2008 compared with November 2008 figures. With interest rates tipped to continue to decline throughout the year, it’s no wonder more home-loan borrowers are expected to refinance their existing home loans.
What is refinancing?
Refinancing is when you switch from one home loan to another but don’t move properties. It involves using some or all of the funds from the new loan to pay out your existing loan. You may refinance with your current lender or switch lenders all together.
People refinance for many reasons including those listed below.
When to refinance
- When your home loan is no longer working for you.
- When you want to consolidate your debts (by rolling all your debts into your home loan).
- When you’re paying for features you don’t need or no longer use.
- You want to obtain a lower more competitive interest rate.
- You wish to switch lenders.
- You wish to borrow further funds against the equity that has built up in the property, ie for renovations or a new car.
- You want to switch from a variable rate to a fixed rate or vice versa.
- Your financial situation has changed since you took out your original home loan.
The benefits of refinancing
Consolidating your debts. Refinancing your home loan may be the best way for you to consolidate your debts, ie. by rolling them all into a new home loan. In simple terms, you take out a larger home loan and use it to pay off other debts like a credit cards or a car loan. This can result in substantial savings since the interest rate on your mortgage is usually lower than that offered on credit cards or personal loans.
Getting yourself into a better financial situation. When you first took out a home loan perhaps you didn’t really consider what you needed and took the first option offered to you. It always pays to check the health of your loan every few years as the chances are your current home loan’s not working for you.
For example you may now require a loan which is more flexible or offers more features. Perhaps you have money earning interest in a bank account and want a home loan which will apply that money to your loan (such as an all-in-one account) or you may be paying way too high an interest rate given the current competitiveness in the market. Refinancing might be one of the best ways to boost your financial health.
Building on the equity in your home. You may wish to draw on the equity you’ve built up on your home. This may mean obtaining a larger loan to finance a renovation or new car purchase. This often makes more sense than taking out a more expensive personal loan.
Costs of switching loans
The costs of refinancing will vary between home loan products and lenders but when adding up figures you need to consider exit fees with your current lender and application or settlement fees with the new lender. Always check that the savings you can achieve will outweigh any exit costs on your existing loans.
You may also need to pay:
- Mortgage insurance, usually payable when you borrow more than 80 percent of the value of your property. Mortgage insurance will often cost more than one percent of your property value.
- A valuation fee (around $200-$300).
- Account-keeping charges with the new lender.
Making the right choice
When considering changing home loans, be sure you get the right advice and do your homework. It will pay in the long run if you shop around and get the best deal for your situation.
Here are our top tips for refinancing:
- Know your costs.
- Be clear about the advantages and/or disadvantages of refinancing.
- Talk to your lender or mortgage advisor before making any decisions.
- Consider using a mortgage broker who has access to a large range of home loans and can save you doing the legwork.
- Don’t take on more debt than you can afford.
- Make sure you have clear goals in mind of why you are refinancing.
- Always obtain the right loan for your needs. Don’t be talked into something that’s just not right.