As interest rates soar, Australians are looking for a better deal on their loan. Here’s what you need to know about refinancing your mortgage.
A record number of Australians are refinancing their homes as the Reserve Bank of Australia continues to raise rates from record highs at the start of the year.
Figures from the Australian Bureau of Statistics reveal that $17.9 billion in loans were transferred to an alternative lender in July, with that figure likely to rise as the cost of living continues to rise and people are paying more attention to their biggest monthly expense: their mortgage.
If you’re considering refinancing your home loan, the good news is that it’s a much simpler process than you might think.
Refinancing can be useful if you are able to find a better rate with an alternative lender or if you want to increase your existing home loan to remove some of the equity in your home.
So stop paying loyalty tax – which is the price you pay for being loyal to your lender – and instead take the time to see if you can get a better deal in the market.
Best interest rates available
Interest rates vary from lender to lender, so do your homework. The Reserve Bank of Australia raised the key rate by 50 basis points to 2.35% in September, the third hike in three months. This bought the cash rate to a level not seen since January 2015.
Interest rates from most lenders hover around 3.6%, but even a 0.1% discount can make a big difference if your mortgage is large.
The lowest home loan rate in the market at the time of writing was 3.50% with the fixed rate loan from Goulburn Murray’s Credit Union.
When shopping, be sure to look at the comparison rate, which is usually published alongside the variable rate. A comparison rate takes into account not only the interest rate, but also all the fees you will pay under the loan program, thus reflecting the true cost of the loan. An interest rate offer, with a high comparison rate, is not a good deal because it means that the real cost (the comparison rate) is much higher when the fees and costs are factored into the loan.
Some borrowers prefer the certainty of a fixed home loan, which, as the name suggests, refers to a static interest rate for a fixed rate period. Some people opt for a two-way bet: fixing part of their loan for a period, and keeping the rest of the loan at variable rates.
Others choose to refinance digital loans, or neo-bank loans as they are known in Australia, which offer competitive rates and a simple online application process, but are better suited to borrowers with a simple loan and not a complex setup.
There is no right or wrong when it comes to a fixed or variable home loan. You will need to make your own risk assessment based on your situation.
However, be aware that if you choose to make changes to your loan agreement, you could be stung by fees.
Before switching loans
Before you do anything, pick up the phone and ask your current lender for a better deal. Let them know that you are thinking of switching providers and that to keep your business you would need a lower rate.
Let them know where you are planning to move, the lowest rates offered and how much the fee compares to what they are offering so you have some bargaining power.
The success of this strategy will depend on a few things. For starters, the amount of your debt and the equity in your home.
Your credit score will also impact your ability to negotiate, so do a quick check on your current score before you pick up the phone.
One of the benefits of asking your bank to lower your interest rate is that you save yourself the hassle of having to go through the refinancing process: your loan package, with all its bells and whistles, remains the same. , only your interest rate changes. They may also want to charge you a fee for the administrative burden of changing your rate, but many consumers have successfully requested that this fee be removed and so should you.
Other mortgage features to consider
There are many other things to consider before making the decision. For example, when you refinance, you will need to go through a formal application process with a new lender. If you’re in a tougher financial situation, you could be bowled over, especially as lenders tighten their lending criteria in a tougher economy.
If you haven’t been with your current lender for a long time, you may not have paid off your mortgage enough to lower your loan-to-value ratio (LVR). Since lenders prefer borrowers with an LVR below 80% for competitive home loans, you may not be able to switch lenders.
Your loan term also comes into play here. If you don’t have long to pay off your home loan, keep in mind that a new lender may give you a longer loan term, which means you’re in debt for longer.
Decide whether you feel more comfortable with a large bank or a smaller digital lender, and what the pros and cons of each are. You may also want to speak to a mortgage broker for assistance.
Steps to refinance your home loan:
- Shop around and see what is available on the market. Be sure to talk to a few lenders you want to switch to and find out if they are willing to take on your debt.
- Once you have chosen your preferred option, you will need to go through a formal application process. This means digging into details about your income, assets, liabilities, and expenses. The lender will then prepare the documents to be signed.
- Once you’ve been approved, your new lender notifies your current lender that you want to be released from the existing loan. Keep in mind that the new lender may want to do their own real estate appraisal on your home.
- Once your new lender has shared the settlement date with your current lender, you will receive a final payment amount. Be sure to take the time to go through the documents to ensure there are no nasty surprises.
- Your new lender will repay your old loan and set you up in their system, with new documentation sent to you so you can start making repayments.
Don’t forget the fees
You are going to want to pass the fees involved in refinancing. Here are some of the likely costs you’ll incur, so be sure to add them up and decide if the savings you’ll realize in the long run are worth it:
- Discharge fees: Your current lender will charge you a fee to terminate the loan agreement, which is usually around $300 or $400.
- New application fee: The new lender may charge a fee for the paperwork, usually around $500. Some lenders won’t charge anything to secure your business.
- Mortgage registration fees: This state government fee to register a new mortgage is usually around $100.
- Insurance premium: If you purchased your home with less than 20% down payment, the original lender would have charged you for lenders mortgage insurance. Your new lender could charge you these fees again, which could amount to tens of thousands of dollars. It is important to make sure of this at the beginning of the process.
- Early exit fees: You have signed a contract, so there will be a fee for breaking that. Known as the early exit fee, this fee, also known as the “break-up fee”, will be determined by the length of your relationship with the lender. Again, it is important to understand these fees before considering refinancing elsewhere.
It should be noted that as competition for mortgagees intensifies, banks are going above and beyond to prevent customers from refinancing and to attract new mortgagees. Many of the fees above are up for negotiation, so shop around to see what your new bank will cover for you on your behalf.
Does refinancing restart the term of your loan?
Unless you want it to, refinancing usually doesn’t reset your loan repayment term. Instead, it replaces your current loan with a new loan of the same term. For example, if you have 15 years left on the 25 year loan, the new mortgage after refinancing will reflect that same timeline and will not revert to 25 years. However, some people choose to change the term of their loan as part of the refinancing process, either lengthening it to pay less each month (however, you’ll usually pay more in the long run) or shortening it to pay more each month. month, but repay the term of the loan sooner.
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When should I refinance my loan?
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What is a digital mortgage?