Refinancing

Home Loan Refinancing

Whether it’s buying an investment property, going on a holiday, getting a better interest rate or finally installing that swimming pool you’ve always wanted; refinancing could be the solution you’re after.

Consolidate your debt

Refinancing your home loan can be a good way to simplify your debt, and potentially reduce the overall interest you’re paying on a number of debts. It uses a process called ‘debt consolidation’. This practice requires several high interest debts being ‘folded’ into one lower rate debt – which could be your home loan – and may reduce your total monthly repayments.

For debt consolidation to be truly cost effective, you need to commit to making additional repayments to pay off the enlarged loan as quickly as possible. If this is not done you could be paying more in the long run. This is because it can turn a short term debt like a personal loan into a long term debt (your mortgage), which means paying interest on the balance for a much longer period.

Switch between variable/fixed rates

Maybe you’d prefer the certainty that repayments will stay the same for a period of time? Or perhaps you may decide that you like the sound of a lower interest rate, and can accept the risk that rates may rise in the future? Home buyers may need to switch between them depending upon circumstances and/or personal preference.

Secure a better interest rate

One of the main reasons that home owners seek to refinance their homes is to reduce their monthly repayments by obtaining a lower interest rate.

Access equity in your home

For most home owners, their house is their most valuable asset. By tapping into their home equity, they have the opportunity to achieve personal goals or build additional wealth.

Access additional home loan features

You may wish to explore a loan that includes:

  • Offset account
    Having a savings or transaction account linked to your loan. The balance of the linked account is deducted from, or offset against, the balance of your loan when the monthly interest charge is calculated.
  • Redraw facility
    This enables you to withdraw the additional repayments you may have made on your loan.
  • Flexible repayments
    To help pay off the loan sooner, you may wish to make extra repayments at no additional cost.
  • Repayment holiday
    Under certain circumstances you may need to take a break from repayments or make reduced repayments to cover career changes or breaks.
  • Loan portability
    The ability to take your loan with you when you move from one home to another without the expense and hassle of arranging a new loan.

However, refinancing can come with some costs, so it’s essential to weigh up the savings of refinancing against the expense involved.

Costs involved with refinancing:

Exit Fees

If you wish to pay out your loan within the first 3 to five years of your term, exit fees may apply. It could be a percentage of the remaining loan balance or it may be a set charge. Check your loan contract for more details.

Although exit fees have been banned on new loans taken out after 1 July 2011, they could still apply to loans taken out before this date. However, exit fees don’t include break costs, which can be imposed if you bail out of a fixed rate loan before the fixed term expires.

Borrowing costs

When you refinance, your new lender may charge a range of upfront fees. However not all lenders charge these fees and some may be negotiable. They may include:

  • Loan application fee  – this is charged when you apply for a new home loan
  • Valuation fee –  your lender may charge a fee to have your property valued by a professional property valuer
  • Settlement fee  – a fee may be charged to pay out your current mortgage by your lender

Lender’s Mortgage Insurance

When you borrow 80% or more of your home’s value, you are required to pay Lender’s Mortgage Insurance. In the instance that you don’t keep up with your repayments, this type of insurance protects the lender. It isn’t transferable between lenders, so even if you paid LMI when you first purchased your home chances are you will be asked to pay LMI again when you refinance.

Stamp Duty

When you take out a mortgage, a tax is charged on it called stamp duty, which is calculated on the amount of the loan. Stamp duty may be payable if you increase the size of your loan through refinancing.

Note that not all of these may apply, depending on your circumstances.

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