Home owners are enjoying a welcome combination of record low rates and a highly competitive lending market. Could that make now the time to refinance your home loan? We look at the why, when and how of switching to a new loan.
Home owners have enjoyed a brilliant run of low interest rates, with the official cash rate refusing to budge from its historic low of 1.5% since August 2016.
In today’s hotly contested mortgage market that’s seen the basic variable home loan rate slide to just 4.45% – the last time home loan interest rates were near this low was January 1959. Back then Elvis was crooning Big Hunk o’ Love, and today’s home owners have the potential to save a big hunk of their home loan interest costs by switching to a new loan in a process known as refinancing.
Why would you refinance?
A quick home loan comparison shows that interest rates vary widely between lenders. More to the point, some lenders reserve their most attractive rates for new customers, and shaving even a fraction off the rate you’re currently paying could lower your home loan repayments, see you save a bundle in overall interest charges and potentially own your home sooner.
But refinancing isn’t all about chasing a lower rate. Your circumstances may have changed over the past few years and your home loan may not have the features or flexibility that match your current lifestyle.
Or, you may have built up some home equity in your place, and refinancing can be a way of freeing up low cost funds to achieve a variety of goals like home improvements or investing in a rental property.
If you’re juggling a variety of different debts, refinancing can also be a handy way to streamline money management through debt consolidation.
What’s involved with refinancing?
The process of switching to a new loan may sound like a hassle but it can actually be surprisingly easy, especially with your Aussie Broker on side to help you find your new loan and then handle the paperwork on your behalf.
First up, it’s worth pointing out that when it comes to choosing ‘the best home loan’ there is no one-size-fits-all solution. It’s a matter of finding the right loan for your particular needs. That’s why your Aussie Broker takes the time to understand your goals and circumstances.
Having selected the loan that matches your needs, your Aussie Broker will assist with applying for your new home loan. This part of the process works in much the same way as when you applied for your current loan. While there’s no need to provide evidence of savings, you’ll still need to stump up some personal ID (passport, drivers license), plus evidence of your income (usually a few recent pay slips).
Lenders will also want to see several recent home loan statements to be sure you’re keeping up regular repayments, and in some cases your home may need to be valued but your Aussie Broker will confirm if this is the case.
When your new loan is approved your old bank will be contacted and informed that you plan to pay down the balance, and asked to provide the payout figures that apply on settlement day.
From here, your new lender pays out your old loan and you begin making repayments on your new home loan. It’s that straightforward.
What do you need to consider before refinancing
Along with the potential pluses of refinancing, there can be costs to consider. Your Aussie Broker will talk you through these to help you determine if refinancing is the right move.
As a guide, there may be some relatively small fees such as mortgage discharge fees on the old loan and application fees on your new home loan.
If refinancing sees you bailing out of a fixed rate loan early, you could face ‘break costs’. It’s hard to predict exactly how much you’ll pay as it depends on how market interest rates have moved since you locked into a fixed rate – but it is a potential expense to be aware of.
Similarly, if you plan to refinance but have less than 20% equity in your home (in other words you are borrowing 80% or more of your home’s market value) you will be asked to pay lenders mortgage insurance (LMI). This applies even if you already paid LMI when you first bought your place.
Your Aussie Broker can do the sums to work out if refinancing will still leave you better off even if LMI applies. Some lenders may let you add LMI to the loan balance allowing you to pay it off gradually as part of your regular repayments rather than as an upfront cost.
Talk to an expert
Rather than wondering if switching to a new home loan is the right step for you, skip the what-ifs by talking to your local Aussie Mortgage Broker about refinancing. It may turn out that your current home loan is still the right choice for you, but either way you’ll have the benefit of certainty.
This article was originally published in 2013 and has been updated.
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