There’s a considerable amount of media interest in the housing market at present fuelled by sharply rising house prices.
While this means it’s going to be increasingly challenging for first home buyers to get into the market, those already on the property ladder can look at their current home loan arrangements and make some potentially advantageous decisions.
Factors to trigger a home loan reassessment
In fact, it’s good practice to look at the home loan package you’re on every few years to make sure that you are getting the best possible deal.
Over time, circumstances change – you may have received a pay rise, may have moved to a higher paying job, or the market may have changed substantially in your area since you took out your mortgage.
Is it still the best arrangement for you?
Does it offer all the features that you need as your position alters?
Three things to think about when considering refinancing
Is this package still the best deal for me?
Do I use all the features the way I intended, such as the redraw facility or the offset facility?
If the answer is no, then you may be on the wrong home loan package.
Have my circumstances changed since I took out the loan?
Have you changed from being a salaried employee to a small business owner?
Or the other way around?
Has your partner changed jobs?
If so, then it’s probably time to look at what options are available to you with other lenders and see if your current lender can match them.
Has the lending environment changed and what does it mean for me?
There are changes afoot in the current lending environment and this will advantage some borrowers.
Are you one of them?
8 refinancing mistakes to avoid
Once you’ve made the decision to re-finance you’re only part of the way there.
Don’t charge ahead without doing a bit of research to avoid the 8 common mistakes many make when refinancing their home loan.
1. It’s not all about the interest rate
If you are simply changing lenders because the interest rate over at Bank B is better than the rate you’re currently getting at Bank A, then you could be making a huge mistake.
You must consider how much it will cost to change lenders.
Also, make sure you’re looking at the comparison rates during your assessment process.
There is an advertised rate and a comparison rate.
The advertised rate is a number that doesn’t take into account fees and other costs, but the comparison rate is set through a formula (regulated by the Consumer Credit Code) and all Australian financial institutions and mortgage providers use this same formula so you know you’re comparing apples with apples.
2. Ignoring exit fees
It’s tempting to brush off the exit fees by assuming it will be a small, once-only cost that won’t really impact your bottom line.
This is what many inexperienced re-finance candidates assume.
If you’re on a fixed interest rate, you will likely have a break fee of many thousands of dollars.
This must be allowed for in your numbers when you’re considering refinancing.
A pro tip: Use a mortgage broker to help you with the decision – they will be able to accurately factor in all the costs and the benefits to help you arrive at a relatively simple decision.
3. Assuming refinancing will be approved
Many people assume that when they apply for re-financing they’ll be approved because they already gained the initial mortgage approval; they make the mistake of thinking it’s just paperwork and it’s a fait accompli. It’s not.
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The lending landscape has dramatically changed in recent years, particularly following the fallout from the COVID pandemic on our economy, and lenders are operating to vastly different rules set by the regulator.
Further, these conditions are still changing as the Treasurer seeks to get policy settings right and manage the impact.
You still need to work hard to get your application approved.
4. Not worth it for 0.5%
You’ve looked around and you’ve found that the best rate you could get is only half a per cent lower than your current rate.
Your current lender won’t match and you’re wondering if all the paperwork and hassle of applying for refinancing with a new lender is worth it.
For half a per cent, maybe! (A mortgage broker will be able to help you know definitively)
But half a per cent on a $500,000 loan (excluding fees) is the difference between $2307 a month and $2181 a month (comparing the mortgage at 2.75% vs 2.25%).
That’s $126 a month, or $1512 a year.
Over the life of the 25-year loan that’s $37,800, not including the compound interest factor.
In short, half a percent is worth worrying about.
5. Fixed loans
Many assume that those on a fixed loan arrangement are locked in and can’t refinance.
That may or may not be true.
A qualified mortgage broker will be able to advise you whether breaking the loan is financially viable and, in the long term, a worthwhile strategy to take.
It might be a matter of short-term pain for long-term gain.
6. Refinancing at the wrong time
Applying for refinancing is best done when you’ve got all your ducks in a row.
You’ve been making solid repayments consistently and you’re a good customer that the bank doesn’t want to lose.
It’s not always as easy if you’re not in a strong position, if you’ve taken a repayment holiday, or you’ve reduced your repayments due to other financial constraints in your life.
So, if you’re in a strong position now, it’s a good idea to strike while the iron is hot to maximise your long-term position.
Make sure you seek expert advice to guide you.
7. Chasing cashback offers
These are great if you can get them as part of your deal, but simply refinancing because of a cashback incentive is fraught with danger.
Many people focus on the “sugar hit” of the $2, 3, or $4,000 refund the bank gives you but beware, they are buying your business and you must make sure the short-term incentive is not outweighed by the long-term cost.
8. Not getting the best advice
There’s nothing we Australians enjoy more than a chat about politics and housing markets around the barbecue.
We’re all armchair experts on the weekend and while it may seem like Uncle Bill, with his six investment properties, might know a thing or two about personal finance, really all Uncle Bill knows is his own personal finance.
He doesn’t know your circumstances and also, it’s unlikely Uncle Bill got into this position without expert guidance.
Make sure you get advice when it really matters – when you’re making changes that will impact your finances, and your life, for the next decade or two.