You may be considering refinancing your home loan in either two conditions. First, either there is a change in your financial condition or there is a drop in home loan rates in the market. It is vital to understand the process and any implications that may arise while you are refinancing and hence below is a consolidated list to keep in mind to make correct refinance decision:
1. Request lower rates from the current lender
It is a good practice to regularly check out interest rates your lender is offering to new customers. So incase, your lender is providing better home loan rates to new customers, you can certainly approach your current lender for a lower rate. If you are associated with the lender for a couple of years and have a consistent repayment history, they are likely to offer you the improved rate.
If you refinance with your current lender, it may be a simpler process and you will generally avoid paying fees. Whereas if you switch lenders in the process, you might be incurred exit fees and break costs. Unlike fixed-interest rate loans, variable interest rate home loans won't attract break costs, but both might still attract exit fees.
2. Switch lenders
If you are not content with how your current lender operates, or you think you could get a better deal elsewhere, it is a good option to switch lenders. Three key things while switching lenders are as below Compare your interest rate with a range of lenders, and not just your existing lender Are there any unique features provided by the lender Check the reviews of the lender about the quality of service they provide
3. Do I want to add any loan features?
Below are some home loan features to be considered while deciding to refinance:
- Offset account: a type of savings account attached to your loan that can help reduce the interest charged on your home loan.
- Redraw facility: you have access to funds from any extra repayments that you make on your loan while reducing interest charges.
- Loan portability: you can easily transfer your loan to another property when you buy and sell your home.
- Split loan: allows you to have part of your home loan charged with a variable interest rate and the other half charged with a fixed interest rate.
Some of these features are generally only available for loans with a variable interest rate. Fixed interest rate home loans are less flexible in that there is usually a limit to extra repayments made, and that refinancing before your fixed period ends could lead to break costs.
4. Make right decision while switching home loan
Prior to making the switch, it's important to consider the reasons you are refinancing. If you are looking out a better interest rate, make sure the amount you save while paying less interest is more than the refinancing costs.
5. Equity in hand before refinancing
You will be in a good position to refinance if you have at least 20% equity in your home. You may still be able to refinance with less equity, but you may be subject to Lenders Mortgage Insurance (LMI) fees. If you have no equity or less than 5%, you might be able to refinance with a guarantor. You can build equity in a number of ways:
- Make more regular repayments (e.g. weekly/fortnightly instead of monthly)
- Make extra repayments
- Use a redraw facility or an offset account to reduce your interest payable, but still, have access to your extra repayments and savings
- Pay larger monthly repayments
- Renovate to increase your property's value