In the last 18 months or so refinancing has been big news because of consecutive rate rises by the RBA. It can be a great way for homeowners to secure a better loan interest rate, but there are several ways that refinancing could actually end up costing you more money.
To help you make the most of your refinancing journey, we’ve put together a list of common mistakes that homeowners make. Avoid them and you’ll be on your way to making sure that refinancing works for you and your financial situation.
Only looking at the interest rate
We know that your interest rate is likely the reason you’re currently thinking about refinancing – and that is fine. The problems can start when you only focus on the interest rate.
Every home loan and every lender is different. That means you may not get exactly what you have now with a lower rate. Do you need an offset account? Does the lender or bank allow you to make extra repayments? What’s the minimum loan amount? Can you pay interest-only?
When you’re comparing different home loan products make sure you think about all these things, but also consider the comparison rate too. The comparison rate of a loan provides an ‘at-a-glance’ view of the true cost of a home loan. Knowing what your current comparison rate is will help you gauge which other loans could be suitable for your needs and saving money.
Not thinking about fees
There are a range of potential fees and charges to think about with home loans, and borrowers often under-estimate the costs of them. Some fees – such as ongoing monthly fees – will be included in the calculation of the comparison rate that we just mentioned, and that’s why it is usually higher than the interest rate being offered.
If you’re thinking about refinancing, make sure you know exactly how much you’ll have to pay. There could be charges from both your current lender and the new one. Some costs to think about, include:
- discharge fees (covers the costs of processing and closing a loan)
- early exit or break fees
- package fees
- application fees
- Lender’s Mortgage Insurance or LMI
- property valuation fees
- registration or establishment fees (covers the cost of loan set-up and administrative costs)
If you will face considerable costs by refinancing your home loan, it could be a while before you see any benefit or savings from a lower interest rate. This is something that is important to remember if there is any chance you’ll want to sell your property in the near future.
Adding more time to your term
When you first took out your existing home loan, you likely had a 30-year term and depending on how long you’ve been paying it off and how much you’ve been paying, the loan term could have reduced quite significantly. You should consider this when refinancing because the new lender will likely offer you a new 30-year loan term.
Although the required repayments will likely be lower than you’re currently paying, extending the loan term out could actually see you pay more interest than necessary over the life of the loan, and delay how long it takes you to clear your home loan debt.
Where possible, it’s a good idea to carry over the remaining term of your existing loan – but only when it makes financial sense for you to do so. Extending the loan term can have it’s benefits if you’re struggling to make repayments and need to reduce the amount to help, for example.
Following intro offers
Found a great looking low introductory rate? With so many different home loans available in Australia, a ‘honeymoon’ offer is one of the ways that lenders try and stand out from the crowd and attract new customers. These offers often feature the lowest interest rate in the market and are available for a very limited time (generally 12-months at the most).
This is great for those refinancers who are wanting to reduce their repayments for a short period of time, but it could turn out to be costly down the line, especially when you factor in any fees and charges. Before taking out one of these intro offers make sure you know the rate you’ll be faced with once the introductory period expires and that the savings you initially make are worth the swap.
Not getting help when you need it
If you’ve gone through the process of refinancing a home loan several times before, you may be confident that you can go it alone. But no matter how many times you’ve refinanced, it can pay to get help when you need it.
You can utilise online tools and reliable information from expert resources. The government’s Moneysmart website provides some great guidance on a whole range of finance-related topics. Be sure to read the Target Market Determination document for the home loan you’re considering (ask the lender if you can’t find it online), and utilise calculator tools available from lenders too. You’ll find a range of home loan related calculators on our website.
An experienced mortgage broker will be able to guide you along the refinancing journey and match you and your financial goals with the right home loan. They will also be able to help you navigate some of the earlier pitfalls we covered in this article.
We also have a team of home loan specialists here at P&N Bank. Whether you’re a current customer or looking to make the switch, the team are available to chat about all things home loans. If you would like to get in touch, you can use this enquiry form or call us on 13 25.77.
Banking and Credit products issued by Police & Nurses Limited (P&N Bank) ABN 69 087 651 876 AFSL/Australian Credit Licence 240701. Any advice does not take into account your objectives, financial situation or needs. Read the relevant Product Terms and Condition, before acquiring any product in considering and deciding whether it is right for you. The Target Market Determinations (TMDs) are available on our website or upon request.