Should I refinance?

Can’t decide whether to refinance or not?

Dear James,

Interest rates are so low at the moment, some of my friends are telling me they have rates of 3.95% and I’m thinking of refinancing my home loan. However, I don’t know a lot about the costs of refinancing or what’s involved around changing my home loan. How do I know whether refinancing is a good idea or not? Help!

Bianca, Bateau Bay

Hi Bianca,

I get asked this question a lot and the simple answer is it depends on what you have now and whether there might be a better home loan offer around to suit your needs.

There is no doubt that interest rates are at historical lows and it could be a good time to refinance dependant on a few things such as your current home loan structure and interest rate.

Here are some tips to help you make a decision on whether refinancing is right for you.

Shop around and compare rates

Often as consumers we have financial institutions we flock to, or we are loyal to. This works in theory if you’ve had great experiences with and are happy to return to them for repeat business HOWEVER these days there are so many choices in the marketplace that we often don’t have the time or the resources to actually seek out what else is available to us.

If you’re not yet ready to engage the services of a lending professional then the best way to compare home loans is to ask for some fact sheets from different lenders. Yes, always include the lenders you’ve used in the past but also investigate some bigger or smaller providers to get a good comparison. Fact sheets should give you all the information you need and in a format that you should be able to complete a direct comparison of features, benefits and fees.

When choosing a home loan, it’s important to work out the features you need from your loan and how much it will cost you in fees.

The carrot for most people to refinance is lower repayments, sometimes it’s not just about the cash in your pocket though. When comparing you’ll want to compare not only your monthly repayment commitments and interest rate, but also the total costs over the life of the loan.

For more complex questions to be answered such as what type of home loan is best for me I always say once you’ve made the decision to switch contact a licensed home loan mortgage professional who will ask you some questions and be able to help finding the right loan for you.

How do your finances shape up?

Many lenders have a maximum Loan-to-Valuation ratio (LVR) up to 95% of the property value, without mortgage insurance this is generally 80% of the value of the property you’re looking to refinance. This means that the more equity you have in your home the better off you are.

To work this out you will need to calculate the balance of your loan divided by your property’s value – when considering the value of any property the bank will consider many things such as house and property size, location and improvements made (including the condition of the property).

Just as you prepared to get your first mortgage, you’ll need to get a handle on your finances before refinancing to find out if you’re even eligible to do so. Lenders use the same criteria for evaluating refinance loan applications as they do home purchase loans, they’ll be assessing whether you can afford your loan repayments. Consider these things

What’s your credit history like?

Do you save money – even if it’s just a little bit?

Do you have maxed out credit or store cards?

Are you on top of all of your loan repayment?

Do you pay your bills on time?

Are you self-employed – have 2 years tax returns available as proof of income?

Do you have an emergency fund?

Final point!

What’s your medium to long term plan? If you’re thinking of up or downsizing within a few years it may not be worth your while refinancing, the costs of refinancing should always be considered when making a decision to move on for what seems to be a better deal. Taking those costs into consideration and the expected savings you will make from refinancing, how long will it take you to recoup the costs of the refinance? If it’s inside the time frame you’re thinking that you’re going to move on then it’s possibly not worth it.

When you’re trying to decide whether or not to refinance it really does come down to why you want to do it; there could be any number of reasons. My best advice to any of my clients is talk to a professional before you make your final decision, any good lending specialist should be more than happy to work with you on your big ‘why do it question’ in order for you to make a sound decision before taking the leap.

Call us on 1300 982 499 so we can help you own your home sooner.

Here at FMS Group we are experts at managing all aspects of our client’s financial lives; we’d love to help you with your finance and lending needs. I invite you to take advantage of our obligation free phone consultation to discuss your needs.

The information above has not taken into account your personal circumstances. Before making any decision speak with an expert in lending whether it’s your bank, mortgage broker or Financial Planner before making any decision to take out a new loan, refinance or take on more debt.

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