Paying off a home loan mortgage takes a dedicated effort over a number of years. During this time your personal circumstances might change, finances could fluctuate, and lenders will vary their interest repayment rates according to financial markets. As a borrower, you may be on the lookout for a better deal, but there are a range of factors to consider before moving ahead and refinancing your loan.
Refinancing your home loan is a strategy that could save you thousands of dollars in the long run. It is a valid and sometimes necessary approach to ensure you are getting the best possible deal, although there are also barriers that could make refinancing your home loan a bad idea.
Refinancing is a good idea in some situations:
- Your financial situation changes dramatically
- Your lender isn’t offering a good rate compared to competitors
- A need to free up some money for other projects or another loan
- You need to consolidate debts such as credit cards
- It’s a good time to switch to a fixed or variable rate of repayment
Refinancing can be a bad idea if:
- Penalty rates for exiting your present contract are high
- You are planning on selling the property in the near future
- Your credit history is not good, and refinancing at a lower rate is unlikely
- Your income is irregular or uncertain
A home loan requires honest appraisal of your financial situation, and the ability to project your situation into the future with a degree of accuracy. Your goal in refinancing might include flexibility, debt consolidation or a lower rate. Your calculations should include any fees that are applied when making the change. These include loan application, stamp duty, legal fees, valuation, plus entry and exit fees attached to your present loan agreement.
Establish a good relationship with your lender
You may have already considered refinancing your home loan and spoken to representatives of competing lenders. If so, you will have noticed that lenders are individuals just like you and me. Some of them will be forthcoming with information and answer your questions to your satisfaction. Others might be evasive or even pushy in getting you to sign a contract. If you feel uncomfortable with a particular lender, it could mean that he or she is not the one for you.
If a lender is moving too slowly with your loan approval, or doesn’t communicate well and make themselves available when you require, it could be time to look elsewhere. You can also make your intentions clear with your present lender. You might be surprised at the lengths they will go to in order to retain you as a customer. It’s not unusual for a lender to waive fees or change your fixed/variable rate free of charge to keep your business.
Choosing the right time to refinance
If you have locked your repayments into a fixed rate over a period of five years, for example, you should start your investigation several months before the five years is up. During the time you have been paying the fixed rate the variable rate may have fallen considerably, and it might be a good opportunity to change to variable. This is sometimes an attractive option when you are earning more than previously and have the capacity to make extra lump sum payments on your loan. The result will be that the principal (total amount owing) is paid off sooner.
Keep in mind though, that rates are constantly fluctuating, and a good variable rate today doesn’t guarantee it will remain so during the following years. The reverse also holds true. When interest rates are low (both fixed and variable) it could be a good time to lock into a fixed rate. At some point, the variable rate will inevitably rise again, and you could find you are paying much less interest during the next few years with your new fixed rate.
Find the break-even point
Once you have established the competitors lending rate, and factored in all fees, taxes and charges, you will need to do your sums. Your new rate must be attractive enough to cover the expenses and leave you in a better financial situation in the present and moving forward. Finding the break-even point and saving money should be the major factors that are used to determine your decision.