With interest rates at record lows, it is widely considered to be a good time to think about refinancing your mortgage or investment loan. There are several advantages to refinancing including lower repayments, special refinancing offers (such as cash back deals) and additional loan features such as an offset account which you may not have with your current loan. While all these benefits are tempting, there are key things you need to consider when you are thinking of refinancing your loan. Here, we outline what you need to consider.
Choosing when to refinance
There are times when refinancing can be particularly helpful. If you are thinking of doing a renovation of your property, if you need streamlined money management or looking to consolidate debt, refinancing your home loan can be helpful. For large expenses such as home renovations or making a big purchase, you may want to access some of the equity in your home when you refinance. Make sure you understand how using this equity is going to impact your new loan first.
Beware of costs
Depending on the lender, refinancing can attract such costs as application fees for the new loan or discharge fees on your current loan. Furthermore, if you have a fixed rate home loan, you may need to pay a break cost to refinance. These fees can add up, especially if you regularly refinance to take advantage of lower interest rates. While the lower rates may be attractive, the fees to keep changing could mean you save nothing at all.
Lenders mortgage insurance (LMI)
You may need to pay lenders mortgage insurance (LMI) if you borrow more than 80 per cent of the value of the property when you refinance. Even if you previously paid for LMI on your current loan, you will need to pay it on the new loan if your loan to value ratio is equal to or greater than 80 per cent.
Check your credit rating
If your credit rating is low, it may not be worth going through the process of refinancing your loan. Just the application to refinance will impact your credit score, so you will impact your bargaining power for future loans if you aren’t successful this time. There are free services you can access online to get your credit number which can help you assess this risk. This is where it may be more suitable to stick with your current loan.
Refinancing is equally as important of a decision as securing the initial loan itself. In fact, you are replacing your existing loan with a new one, so make sure you complete your due diligence and make an informed decision. It is best to speak with a mortgage broker and your chosen advisory professionals to make sure refinancing is a fit for your financial situation – if you need to be connected with some trusted contacts in this space, please reach out to our team and we’ll be more than happy to assist in connecting you through our network.
Remember, this article does not constitute financial or legal advice. Please consult your professional financial and legal advisors before making any decisions for yourself.