Is refinancing the right choice for you?
If you’re thinking about refinancing your mortgage this is not the time to jump in boots and all without doing a little bit of homework. Chances are your existing loan suited your needs a few years ago, but as your financial situation has changed a new loan type could be more appropriate.
It makes sense to take advantage of the market conditions we’re currently experiencing in Australia. Refinancing can be a positive way to put yourself in a better situation regarding your loan and more importantly the repayments you make.
With the recent interest rate rise, smart borrowers are ensuring they’ve got themselves set up with the right product to maximise their loan repayments and help them achieve their goals.
And that often means refinancing to a more suitable product for your own personal situation.
Is refinancing right for you?
Every mortgage is different. And everyone has different circumstances, commitments and goals they want to achieve.
Making a decision about which lender and which loan product is right for you can be tricky. A good mortgage broker will help you navigate the process and make sure you understand what refinancing will mean for you.
Not only do you need to choose the right lender. You’ll then need to decide which product. And it’s not as simple as going for the best interest rate. There’s a range of other things to consider ranging from product features to loan costs.
Sharing the reason about why you want to refinance with your mortgage broker is important. And asking the right questions will make choosing the loan that best fits your needs easier. We’ve come up with 10 things you need to ask your broker before refinancing.
But before we get started, it helps to understand what refinancing is and what a mortgage broker does.
What is refinancing?
Refinancing means moving your home loan from one lender to another.
Essentially you’ll be transferring your old mortgage to a new lender with different terms. This may mean a new home loan balance and a new repayment amount.
What is a mortgage broker?
A mortgage broker works with lenders to find you the most suitable home loan product with a competitive interest rate. A broker can help you secure a new loan and/or refinance any existing loans. All loan negotiations are done on your behalf by the broker with the loan provider.
Because most mortgage brokers have access to literally hundreds of different loan products, they’re able to better match your personal situation with a product to suit.
A good broker will provide you with professional advice tailored to your individual circumstances. They can help you understand the finance and refinancing options available to you and help you choose the best options to suit your needs.
You don’t usually pay a direct fee to the broker. Instead, they receive a commission from the loan provider, which doesn’t impact your loan repayments or cost you anything as the consumer at all.
Ten things to ask your mortgage broker before you refinance
Asking these questions will put you in a great position to make an informed decision about which refinancing option is right for you.
- What are the costs?
It’s important to ask about any upfront fees associated with refinancing. Mortgage brokers will outline what fees you’re likely to pay when you decide to switch lenders or change your mortgage product.
Some of the costs you might be up for include discharge fees from your existing lender, set-up fees, and valuation fees.
Learn more about the costs involved with refinancing here.
- What’s my property value and equity?
You might be refinancing to secure a lower interest rate. Or perhaps you’re wanting to ‘cash out’ some of your equity for other big costs such as renovations, investing in property, or taking that dream holiday. Regardless of your reason for refinancing, you’ll need to consider the current value of your property and how much equity you have in it. The value and equity you have will directly influence the types of loans available to you.
- What interest rate will I pay?
While we’re all on the lookout for a low interest rate, it isn’t the only thing you should be looking for.
Your mortgage broker should consider and explain the comparison rate rather than the advertised rate. Sometimes the lowest interest rate can end up costing you more when you factor in extra fees.
While your interest rate is a certain percentage, your loan’s comparison rate also takes into account any fees and charges on the loan, as well as the interest rate. So it better represents the overall cost of the loan during the total repayment period. It’s for this reason comparing comparison rates is often a better way to compare loan products.
Also, remember to check if the rate being offered is an introductory or “honeymoon” rate. If it is, what will the rate move to once the honeymoon period is over?
- Is fixed or variable the best option?
There are two types of interest rates, variable and fixed.
- Variable rate – the interest rate can rise or fall over the life of the loan.
- Fixed rate – your interest rate will stay the same for an agreed time, usually between 1 and 5 years.
Consider your personal financial situation to decide which option is best. Or sometimes a combination of the two is possible.
With interest rates beginning to rise, you might want to consider refinancing to a fixed rate product.
Learn more about which mortgage type best suits your needs.
- What is the term of the loan?
When you refinance, you need to think about how long the new loan term is. If you’re already a good few years into your current mortgage, then refinancing could mean your loan term increases. This is great in terms of reduced repayments but can also impact the amount of interest you will pay over the life of the loan. So when you are refinancing you want to ensure you do some calculations around the potential pros and cons. Because although the new loan might reduce your regular repayment amount if it’s over a longer period, the total cost of the loan could end up being more.
Refinancing to a shorter term has the opposite effect. You could save on the amount of interest you pay, but your regular repayment amount will increase.
Try our repayment calculator.
- Are there any loan features?
Refinancing is the perfect time to take advantage of loans with features that can help you save on interest or manage your finances better. Some features that could be beneficial are offset accounts, redraw facilities and extra repayments. But check out the cost of having the added features, and make sure it’s worth the benefits you’ll get.
- Are there any fees for additional payments or other restrictions?
Being able to make additional repayments on your home loan is important. It gives you the flexibility to pay off your home sooner and save on interest payments. Making extra repayments could potentially save you thousands of dollars on interest.
Your mortgage broker should go over the terms and conditions of the loan product you’re considering and explain to you in detail any fees or restrictions.
Also, find out if there are any restrictions as to when you can refinance or switch lenders in the future.
- What do I need to qualify for refinancing?
Every lender has their own standards that you must meet to qualify to refinance. Most lenders require you have at least some equity in your home before you can refinance.
In most instances to qualify you’ll need to:
- be an Australian resident or permanent resident
- have a good credit history
- be employed with proof of income
- be over 18 years old
Remember though, using a broker can benefit you greatly as they’re able to negotiate on your behalf.
- Are you a licenced broker?
It may seem obvious but make sure the broker you use is licenced to give you advice. Even better, it’s worth finding a reputable and experienced finance broker like Loan Gallery, whose processes go beyond the standard expectation, including a focus on compliance practices.
ASIC has updated lists of licenced brokers, so it’s a great place to make sure you’re getting qualified advice.
- How do you get paid? Is it different for each loan product?
Lenders pay the broker a fee or commission for selling their home loan products. Some brokers get paid a standard fee regardless of what loan they recommend. Other brokers get a higher fee for offering certain loans.
Sometimes, a broker will also charge you a fee directly. This could be instead of, or as well as, the lender’s commission.
At Loan Gallery we do not charge any fees to our clients. Our brokers are paid the standard fee by our lenders.