There can be no denying that homeowners can save a lot of money by refinancing their home loans, but there’s a lot more to it than simply finding a lower interest rate and making the switch. If you’re not careful, it can be very easy to make a mistake – and this could cost you in the long run.
Ensure that you’re able to make good choices by familiarising yourself with the top five traps that homeowners make when refinancing their home loans.
1. Focusing Solely on Interest Rates
Although interest rates have been changing frequently over the past few months and getting the best rate possible is the driving force for many homeowners, it’s important to remember that there’s a lot more to a home loan than the interest rate. Flexible features (like an offset account or redraw facility), for example, may help you to pay off your mortgage more quickly and will save you money in the long run – even if the interest rate is not the lowest.
Some homeowners also like to consider other factors when choosing a lender, such as whether their social and/or environmental values align with yours, whether you can speak with a real person should you need help, and so on.
2. Assuming You’ll be Approved for Refinancing
Many homeowners assume that they’ll be approved for refinancing quickly and easily because they’ve already been approved for their current mortgage. It’s important to remember that refinancing is not as simple as making a phone call – each time you refinance, you have to go through the formal application process all over again.
Keep in mind that the home loan market is constantly changing – interest rates and serviceability buffers are always rising and lowering. Even if your financial position is just as good or even better than it was when you were approved for your current mortgage, refinancing approval is not guaranteed.
3. Not Comparing Lenders
You would be amazed at how many people settle on a refinancing option without comparing different lenders. Many homeowners assume that it’s easier to work with their existing lender, but this is not the case – the process of refinancing is the same, whether it’s with your existing lender or someone new.
Plus, your loyalty can actually cost you – lenders are more likely to give a new customer with no loyalty to them a better deal than loyal customers who’ve been with them for decades. Another advantage of shopping around is that a new lender may offer rates and benefits that your current one simply doesn’t. Even small improvements can result in thousands of dollars in savings.
4. Not Seeking Advice From a Broker
Whilst there are various tools available to help you when refinancing your home loan (such as the moneysmart.gov.au website), seeking advice from an independent mortgage broker can be invaluable. An experienced broker will take the time to understand your situation and goals (financial or otherwise), helping you to find the best solution for your needs.
A broker will put in the leg work for you, comparing the interest rates on offer and the cost of obtaining each of these rates. They’ll discuss the advantages and disadvantages of each option with you, plus they’ll guide you through the documentation process, helping you to make an informed decision.
5. Refinancing too Often
Have you ever heard the saying that it’s possible to have too much of a good thing? If you’re not careful, refinancing your home loan too often could get you into hot water.
The main reason for this is that refinancing is expensive. Closing expenses for refinancing a mortgage generally range from around 3 to 6% of the loan total (although it will be less costly for high-balance loans). You need to ensure that the savings you’ll make on interest will offset these closing costs to make refinancing worthwhile. Refinancing frequently means that you accumulate closing expenses, increasing your debt and negating any savings.
Home Loans Are Long-Term – It’s Time To Stop Thinking Short-Term
Many homeowners will spend the greater part of their adult lives paying off their mortgage. Most home loan terms are for 30 years, but changing financial situations and the need to upgrade to a larger or more expensive property often mean that mortgages last far longer. It’s time that homeowners stop thinking about the short term and start thinking about how they can save money in the long run.
Figure out why you need to refinance – do you want a lower interest rate, to consolidate your debts, or do you just think there are better offers out there? Then it’s time to do your research, speak with an independent mortgage broker, and start compiling the facts so that you can make an informed decision regarding your future.