Understanding refinancing. What questions to ask and what to know.
What would motivate you to refinance your existing home loan?
We hear regularly in advertising and the media about refinancing your home loan and the current rates on offer, however for most of us it is something we won’t look at unless triggered by some other event.
This could be purchasing a new home or investment property, doing some renovations or improvements, or consolidating other personal liabilities against your home.
So what do you need to understand before refinancing your current home loan?
What does it cost to refinance my home loan?
The financial cost will vary depending on the lender and type of product you are on.
From 1st July 2011 lenders were banned from charging exit fees on new loans to provide greater competition in the home loan market.
While a lender cannot charge you a fee to discourage you from switching your loan, they are able to charge a discharge fee to cover the cost to the bank for discharging your loan. Across most lenders this is around $350.
There are also Government charges to consider, such as the cost to discharge the mortgage held by your current lender and mortgage registration fees from the new lender. This is currently $107 per mortgage discharge and $107 per mortgage registration for each security property.
Fixed rate loan break costs
Fixed rate loan agreements are another exception. Where you have entered into a fixed rate loan agreement, usually for a term of one to five years, the lender is allowed to charge you a break fee. The fee is based on their lost income for the remainder of the fixed term, and can range from nothing through to tens of thousands of dollars.
There is no simple formula to estimate this cost, but it is based on the remaining fixed term, your fixed interest rate, and the cost of funds to the lender at the time, current interest rates and current lender cost of funds.
For an accurate fixed loan break fee cost you need to speak to your bank.
Lenders mortgage insurance
If you have paid Lenders Mortgage Insurance with your current lender due to borrowing more than 80% of the property value, if your borrowings are still over 80% when you refinance this premium paid is not transferable to other lenders.
Even with all the costs outlines above refinancing is often a move that will save you money over time. Or there may be other reasons you need to refinance your loans that are independent of the cost.
It is important to understand those who are always chasing the cheapest rate and switching loans and lenders may be no better off (or even worse off!) in the long run.
Question to ask:
The costs associated with refinancing can be complex, ranging from under $1,000 to many thousands of dollars.
What you need to ask and understand is what is the net benefit for you of switching loans once all costs are taken into consideration in order to make an informed decision.
How often should I review my current loan?
The simple answer to this is when it is in your best interests to do so, not the banks.
In general, if you have had your current home loan for three years or more you will not be getting the best deal and should have your loan reviewed.
There are two main reasons for this.
- Firstly, the best lender today is most often not the best lender next week, next month or next year. What could have been a great deal when you got your loan may not be competitive in the current market.
- Secondly, lenders regularly change their products, and the product or rate you received when you took your current loan out may have changed to a different product or rate.
My recommendation is to always engage a high quality broker rather than approaching your current lender. Your existing lender will only speak with you about their current products and not the better deals a competitor may be offering, where a good broker will know about all products in the market and how these compare to your current loan.
Question to ask:
Ask your broker why they have recommended a certain loan product and lender. You need to be satisfied with the answer and discuss any concerns you have with them before proceeding.
Have circumstances changed?
When looking to refinance, it is important to understand what you can borrow today may not be the same as what you could borrow when you established your current loan.
Some personal changes could include income increasing or decreasing, more or fewer other liabilities, and changes to your family situation such as a partner or more children.
The lending environment is also constantly changing, with regulatory (Government) and changes to bank lending policy happening on a weekly basis.
The type of loan you originally took out may have met your needs at the time, but your needs may now be different.
You could now be in a better position or worse off – This is another reason to speak with a professional who knows the market and help you to understand what your current options are.
Question to ask:
What are my current options based on my current circumstances and the current lending environment? Why have my options improved or worsened, and what can I do to improve them? Does the new product meet my current needs and my future plans?
Lenders are all looking for new clients, and at times this will come at the expense of looking after the customers they already have.
The banks and other lenders regularly offer cash back and other incentives to assist with the cost of refinancing away from your existing lender.
Your existing lender will also have their own policies and processes when they find out you are leaving them.
Many lenders will take up to 21 days to process a discharge request from your new lender, and receipt of this request will usually trigger a call from the banks customer retention team.
We recommend you ask your current lender for their best offer before you look at switching lenders, and to be cautious with what the sales staff in the retention team promise.