Many people start to think about refinancing when interest rates or their personal circumstances change. If you are refinancing for what looks like a better home loan, the most important thing to consider is the long-term benefits against the actual costs of refinancing.
There are a number of lenders to choose from which are mainstream bank lenders and non-bank lenders, and they are all wanting your business so it does pay to use a mortgage broker. From time to time they also have special offers which can make a big difference what it would cost you to move lenders.
Refinancing Your Home Loan
You need to consider the following before refinancing your home loan.
- Why do you want to refinance and what do you hope to achieve
- Check for any exit or deferred establishment fees that may be required to pay when you move to another lender.
- What are the establishment fees on the new loan.
- Are there any other direct or indirect costs to establish a new loan.
- If you are refinancing to a fixed loan or a honeymoon loan, find out what the repayments will be once the interest rate reverts.
- If you are refinancing to access equity, make sure that you have done your sums correctly on your needs and that there is enough equity available in your property to go ahead.
Going from bank to bank and sorting out what is the right option for you can be a daunting task and the different lending criteria between banks can be quite confusing (not to mention time-consuming). If you need help with your mortgage finance and look at more lender options is to contact me about your situation so we can talk about the costs, mortgage rates and the types of loans available for financing a home.
This is the most common type of home loan. Most lenders will allow a maximum term of 30 years. Most of your repayments in the early stages of your loan pay off the interest, while most of your repayments in later stages of your loan pay off the principal (the original amount borrowed).
You can take a table loan with a fixed rate of interest or a floating rate.
You pay the interest-only part of your loan and none of the loan itself, so the payments are lower and can make it easier on your cash flow. It is quite common to take an interest-only loan for a year or two and then switch to a table loan after that.
Revolving credit loans work like a giant overdraft. You pay can go directly onto your loan account and bills are paid out of the loan account when they’re due. By keeping your loan balance as low as possible as often as possible means, you pay less interest because lenders calculate interest daily.
You can make lump sum repayments onto your loan and re-draw any money up to your pre-approved limit.
This takes a highly disciplined borrower because there is the risk of always drawing back to your limit and never repaying the original loan amount.
This is similar to a Revolving Credit facility where you have the flexibility to redraw any extra repayments you have made on your loan, but the safety net that your maximum loan facility reduces over a period of time to make sure you repay all the loan at the end of the loan term.
Any extra repayments you make on your loan will help reduce your interest charges and therefore save you a substantial amount of interest over the long term.
Any extra repayments you make, will be available for you to redraw at any time without penalty.
This is when you fix your interest rate for a period of time and can be from 6 month up to 5 years. Some lenders may offer other options but these are the most common.
The benefit is that your repayment is fixed and provides certainty for that period of time.
If interest rates move down, your repayment does not as it is fixed for that period of time. However, if interest rates go up, your repayment does not either.
Keep in mind that if you are in a fixed rate and choose to repay your loan while you are still in your fixed rate period, there may be penalties charged to you by the lender.
This is where your loan moves with the current interest rate market. So if interest rates go down, so does your repayment, and if interest rates go up, so does your repayment.
Floating rate loans provide a little more flexibility and should you decide to repay your loan, there should be no penalties for do so while you are on a floating rate loan.