Tips for Refinancing Your Home
There comes a point when most home owners are looking at refinancing, whether that be to assist with the purchase of an investment property or due to the lure of a lower interest rate. If you are thinking of refinancing your home sometime soon, here are a few tips and things to look out for;
1. Always do your sums on exit fees
Don’t fall into the trap of thinking a lower interest rate is always going to save you a lot of money. Early exit fees on mortgages can be hugely prohibitive and outstrip any savings that going for the lower rate would have given you. While the Australian government stepped in and banned lenders from charging early exit fees as of July 1st 2011, anyone with a loan from an earlier date (which many still do) may be charged the fees. Even if you will be exempt from early exit fees, bear in mind that your current lender may charge you discharge fees while your new one may charge application fees or other upfront costs. Sometimes that lower interest rate is not as shiny as it appears!
2. Check the comparison rate
Advertised headline rates may seem appealing but remember these do not take costs into account. A comparison rate is a much better tool to use than headline rates as it incorporates known ongoing costs so is a better way to compare rates. You also need to know that comparison rates are based on a $150,000 loan taken out over 25 years, so if your loan amount or term is different, this will affect the comparison rate.
3. How’s your credit score?
It pays to always know what is going on with your credit score and whether you have had any defaults listed recently. It is much easier and cheaper to secure lending with a clear record so keep a track of your score and know what lenders will be seeing when they check it. If there is something on there and you know about it, it is much easier to take care of early and come to the lender with transparency rather than find out at the last minute.
4. Check out your current property value
Since the GFC many Australians have found themselves in the lesser-known position of owning a property which has decreased in market value. This can be problematic for refinancing as you may find that you do not have as much equity in your property as expected or you may be pushed into the low-equity zone (less than 20% equity, or often more for those who are self-employed or rural owners). If you are in this position you may find that you are required to pay extra costs such as Lenders’ Mortgage Insurance (LMI). Again, this is a cost that may make it not worth your while to go ahead with refinancing.
Overall, if you are looking at refinancing your home, make sure you do some research into exactly what different lenders are offering and what costs may be included that are not as immediately apparent as a headline interest rate. The better your equity and credit score, the more negotiating power you will have with lenders, so see what they can offer in terms of reducing or eliminating fees too.