The five big refinancing mistakes to avoid
SAVING money is the aim of the game when paying off a mortgage. When it comes to getting the best out of your home loan, you've heard about refinancing. But what is it?
In short, refinancing is the process of taking out a new mortgage to repay an existing loan. Many homeowners do this to take advantage of a lower interest rate or more favourable terms. This can be as daunting a process as applying for your first loan and isn't the same. If you're thinking of refinancing - or think it's a good idea now! - here are five common mistakes and how to avoid them.
1. Not shopping around
If you feel like you can refinance with your current bank and save yourself the "hassle" of shopping around, you are certainly welcome to try. However, competition in the mortgage market will bring out the best deals instead of settling for the limited loans on offer by one bank. Shop around - you don't know what you might find!
2. Refinancing when times are tough
It's tempting to think refinancing will solve all your money woes when times aren't as great as usual. Sometimes sticking it out in a loan to build up equity before jumping ship will leave your finances in better shape. Refinancing should come from a place of greater power in your equity and finances instead of the other way around.
3. Looking at the interest rate
A lower interest rate vs your current rate - seems like a no brainer to switch. The interest rates you see, unless they are comparison rates, don't show you all the different kinds of fees you might have to pay. These fees might be mortgage discharge fees, application fees, stamp duty, and Lenders' Mortgage Insurance if you don't have high equity. "Marketing will always show you low interest rates, but it's not the whole story," says Savvy CEO Bill Tsouvalas. "You should talk to a broker who can navigate you through comparison rates, different home loan refinance options, and other bits and pieces that could save you money."
4. Not considering cancellation costs
Are you one out of almost two home owners that doesn't understand some of the jargon around home loans? According to Westpac's Home Ownership Survey, terms like "equity" and "early repayment fee" confuse us. It pays to brush up, though: exiting a loan is sometimes more expensive in the short-term, eating up any potential savings you might make. Breaking a fixed home loan can prove very expensive, and its up to you to figure out if it's worth it for the new loan deal. You need to ask your bank or lender how much it is to break the loan, including any costs for early repayment.
5. Playing economist
Interest rates in Australia have been on hold for a record 31 months at a low 1.5% p.a. (as of writing.) If you are trying to play the market, you have been waiting a very long time! In late 2018, the "Big Four" banks increased their interest rates due to overseas borrowing costs. If you see a good deal and it satisfies all the checkmarks, go for it. There's sometimes no upside to waiting.