What should you consider when switching your home loan?
Have you been thinking about renovating your home? Perhaps you have been thinking about upgrading to a bigger property, or using the equity in your home to buy an investment property? Maybe you have been in the same home loan for a while and are wondering whether there is a better, more competitively priced product on the market for your needs? Whatever your situation, you may find that refinancing can help you achieve your goals. By refinancing, you may be able to secure a sharper rate and thus lower your regular mortgage repayments. In addition, you may be able to consolidate some of your other debts into your mortgage or unlock equity and finally start those long-planned renovations. But while there are many perks associated with refinancing, there is also a lot to consider before heading down this path, including:
Fees and charges
Sometimes, even when you refinance into a sharper rate, you don’t end up saving money. The simple fact is refinancing isn’t a free process. In fact, there is often a raft of fees and charges associated with refinancing. As such, it is critical you understand the costs and work out whether the charges outweigh the financial benefits. When refinancing, it’s important to factor in all possible costs such as application fees, mortgage registration fees, Lenders Mortgage Insurance and even break costs. Break costs are often incurred when you try to break out of a fixed rate term early. Your local broker can help you understand what the various fees and charges associated with refinancing will be so that you can decide whether this is the right path for you.
Lenders Mortgage Insurance (LMI)
Depending on what your loan to value ratio was when you took out your loan and how much of your loan you have paid down, you may be required to pay LMI. As a general rule of thumb, if the amount you wish to borrow is more than 80 per cent of the value of your property, you may have to pay LMI, which can be costly.
If you do refinance, you will have to consider the type of loan and loan facilities that you want. For example, do you want the security of a fixed rate mortgage, or do you want the flexibility to make additional repayments? How you answer these questions will ultimately help you to determine the type of loan product you want. You also need to ask yourself what loan facilities you will need. Are you looking for a product with all the bells and whistles, or are you looking for a simpler product that maybe just comes with an offset account and redraw facility? Your local broker can talk you through your options and see which products and product features would best suit your needs and future goals.
If you’re already 10 years into a 30-year loan, you don’t want to refinance into another 30-year mortgage. Don’t make the mistake of signing up to another 30 years just because the interest rate on the new loan is smaller. When refinancing, the key is to know what you want and do your research. The better informed you are, the more likely you will be to find a product that suits your financial situation. Remember, if you see a deal that sounds too good to be true, it probably is!