10 Things You Must Know Before You Refinance Your Mortgage

Refinancing seems like an excellent choice for many Australians. While it is definitely true that refinancing could help you save money, over the course of time, it isn’t always the case. In fact, there are several things you should consider before going down this path. So, we’d like to outline the main mistakes that Aussies are likely to make when it comes to refinancing. Keep on reading!

  1. A Lower Interest Rate Isn’t Everything

Many Aussies are tempted to believe that getting a lower interest rate is the only reason why they should refinance. This is why as soon as a bank or lender offers them this, they will refinance.

Nonetheless, the thing is that lower interest rates come with hidden costs. For example, the loan might entail a range of additional fees. Or, perhaps, the low interest rate will revert to a higher rate when the initial introductory period has ended. Make sure you know the full picture, what the associated costs are, and if the offer is a lifetime discount, or a temporary discount.

STOP PRESS: If you’re sick of High Interest Rates

Take our 45 second rate quiz to see if you qualify for a better deal on your mortgage!

  1. Research Is Important

It’s worth noting that the lending market is really competitive. That is to say, if you take the time to shop around (or find a great mortgage broker that will do the shopping for you!), you are likely to find a lot of offers – some more convenient than others. Even so, there is a difference between applying and doing research.

As a rule of thumb, you should avoid filing numerous applications, because this is likely to harm your credit rating. On the opposite, doing research includes knowing what the market has to offer before making a rushed decision.

  1. Not All Lenders Are Reliable

There are some smaller and private lenders on the market that promise great low interest rates. Some of these can work out really well, whilst other times, these smaller lenders could come with poor quality service and no way to get help when you need it. So, they might advertise that they offer affordable interest rates and great loan terms, but if their service isn’t known as being reliable, you should consider steering clear of them to be on the safe side.

  1. Look for Lenders Offering Financial Rebates

There are some lenders out there that provide refinancing rebates as a means of winning over your mortgage. These seem like offers you just can’t refuse and could be a great way to cover some of your switching costs.

Depending on the lender, you can find rebates of $1000, $1500, or even $2000 or more sometimes. It can be a great offer but consider them carefully – sometimes bright shiny objects can cloud your judgment. If the overall offer stacks up then go for it, but if there is cheaper rates out there without the rebates, then make sure you’ve weighed up the difference over the life of the loan!

  1. Always Calculate the Breakeven Point

In order to determine if refinancing is worth it or not, you should always calculate the breakeven point. For instance, let’s say that the refinancing costs are $6,000. Additionally, let’s assume you’ll save approximately $100 per month in this example.

What you should do is divide $6,000 by $100. What you get is 60 – this means that it will take 60 months, namely five years until you break even. This shouldn’t necessarily be an issue if you’re planning to stay in your home until then. On the other hand, if it’s only $1,000 in refining costs and you’re savings $200/month, it’s only 5 months till you break even – after that you’re set. We always seek options that break even as soon as possible so that you can reap the savings sooner.

  1. You Should Assess the Length of the Loan

When looking for a more attractive refinancing offer, most homeowners assess the interest rate alone. Nonetheless, a lower interest rate could also mean that the lifespan of the loan is longer if you are refinancing back over a 30-year loan term.

In the simplest terms, a longer loan term means that the monthly payment is lower. however, over the course of time, this would mean that you’ll be paying a lot more in interest rate than you would with a short-term loan. You might want to consider refinancing with a similar loan term to what you have left on your current mortgage. If the budget is a little tight, you can of course still look to refinance over 30 years, but it pays to know what you’re up for up front!

  1. Don’t Underestimate the Cancelation Costs

If you’re currently on a fixed rate contract, then you should know that the break fee could be considerably high – we’ve seen them come in at no cost at all at times, way up to thousands of dollars. If you’re considering refinancing a fixed rate home loan, make sure you ask your lender for a fixed rate break quote. This should include the early repayment cost, as well.

Essentially, when you compare and contrast this with the costs of another loan, you could use this for making a sensible decision.

  1. Don’t wait till you’re struggling to meet the repayments to refinance

As a rule of thumb, it is best to refinance when you are in a good financial place. If your credit history is good, and your repayment history portrays you as a reliable borrower, then the chances of getting competitive loan terms are quite high.

That is to say, as opposed to refinancing in order to get through financial difficulty, as you are less likely to benefit from really convenient terms and refinancing might not make any sense. That being said, if it gets you back on track then it would be well worth it and you can always review the mortgage again later once everything is going well.

  1. Determine the Real Value of Your Home

It is a common mistake for borrowers to overestimate the value of their homes. This is why you should determine the actual value of your home before you refinance if it’s possible, as opposed to relying on old information. Even if your house was worth $400,000 a couple of years ago, this doesn’t mean this hasn’t changed since then.

What is more, in the case in which you didn’t build enough equity in your home, the odds are that you’ll get a less convenient refinance offer than what you had in mind.

Some mortgage brokers can access free bank valuations, so it pays to chat with a mortgage broker before you refinance and get a valuation done.

  1. Decide on Short vs. Long Term Loans

When you refinance, you basically take out a loan to pay for another loan – creating an entirely new loan. This will allow you to change the timeline of the payments, depending on your budget.

Most people decide to go for longer terms, mainly because it allows them to pay smaller sums every month. However, the shorter the timeline, the less you will have to pay in interest. In the long run, it might be more financially beneficial for you to go for shorter terms.  If you only have 25 years left, do you really need to refinance it for another 30 years? Perhaps your budget it a little tight, in which case it would make sense. But if you want to clear your mortgage, consider setting the new term in line with the remaining term on your current mortgage.

Final Thoughts

To conclude, these are some of the main things you should know if you’re considering refinancing. Bear in mind that each financial decision comes with its pros and cons – the same applies to refinancing. Evidently, it’s up to you to analyse each one so that you can make a sensible choice. Afterwards, you can rest assured that you’ve made the right decision for your long-term financial security.

It’s time to take back control of your finances

Take our 45 second rate quiz to see if you qualify for a better deal on your mortgage!