6 factors to consider before refinancing a home loan

So when it comes to refinancing, try to keep the following six things in mind:

  • Your interest rate
  • The interest rate environment 
  • Your property's value and equity 
  • The costs of refinancing 
  • Your credit rating
  • Your reasons for refinancing 

Refinance factor #1: The interest rates 

Arguably the most important reason for refinancing is to get a better interest rate on your home loan. A difference of just a few percentage points can lead to an overall repayments difference of tens of thousands of dollars. Roughly 30% of homeowners are currently facing mortgage stress (about 30% or more of their take-home income going towards their repayments) according to the latest data from Digital Finance Analytics, but this number could be smaller if they just had a lower interest rate. 

Compare interest rates to see if you're going to get a better deal. Current interest rates aren't always permanent, however...

Refinance factor #2: The interest rate environment

Interest rates on home loans are affected by a wide net of factors, but one of the most important is the official cash rate, set by the Reserve Bank of Australia (RBA). Home loan rates tend to move when the cash rate does - a raised cash rate sees lenders increase their own rates and vice versa.

The cash rate at the time of writing (July 2019) is at a record low and could get even lower. Low cash rate environments can be a good time to refinance, particularly to variable rates as they could get even lower. On the other hand, lower cash rate environments always have the potential of increases down the line, and it can be upsetting when you switch to a new home loan for its low interest rate and then having a rate rise soon after. 

Make sure you keep up with the latest news on home loan rates so you have an idea of whether they might soon rise or fall. 

Refinance factor #3: Your property's value and equity

Building up equity in your property is helpful for refinancing, as the equity can essentially act as a deposit. Equity in your home of less than 20% of its value might mean you have to pay Lenders Mortgage Insurance (LMI), just as you would with a deposit of under 20%. 

The equity is the difference between the value of your home and the amount still owed on your loan. If the value of your property has risen since you first bought it, your LVR (loan-to-value ratio) will be lower, meaning you have more equity and thus greater borrowing power. 

Refinance factor #4: The costs of refinancing

Refinancing isn't free - depending on the loan there can be a number of fees charged, like application fees, valuation fees, discharge fees and more. If you're on a fixed home loan with your current lender, you might also have to cop a rather expensive break free. These can sometimes be a few thousand dollars. 

You have to factor in these costs when refinancing. A good way to do this is to use an online calculator to compare how much you're currently paying with the total savings you would make on the new loan inclusive of fees. Read the terms and conditions of your loan of just ask your lender what each of the associated fees are. 

Refinance factor #5: Your Credit Rating

Refinancing is considered a credit application, meaning it depends on your credit score. If your credit score isn't too crash hot, you might find it working against your efforts to refinance. Rejected refinance applications can also negatively affect your credit score, so as a first step, find out if you qualify for a home loan. At loans.com.au, getting pre-qualified won't affect your credit score and it only takes two minutes. 

FIND OUT IF YOU QUALIFY

Refinance factor #6: Your motives for refinancing

Are you refinancing just to get a better interest rate? Or are there more reasons? Ask yourself the following questions to help figure out what loan is best for you:

  • Do you want a more flexible loan? One with extra features, or more regular repayments? 
  • Are you trying to consolidate other debts into your home loan (like credit card debt or a car loan) 
  • Do you need to access the equity for something major (like a renovation)?
  • Are you looking for a shorter or longer loan term? 

Remember that if you tell your current lender you're refinancing, they might try to counter an offer you have with a better one. This doesn't always work, but it's worth considering!

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