Interest rates are at a record low and competitive deals are now being offered – it may be appealing to switch to a new lender or loan because of the potential significant savings you can make.
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The Reserve Bank of Australia (RBA) has recently cut rates and lenders have lowered mortgage interest rates with some offering below 3%. However, there are several things to consider before you decide to refinance.
First, find out if you will be better off in the long run. You can lower your monthly mortgage payments by refinancing to a lower interest rate but choosing lower repayments often means signing up for a longer loan period and higher accumulated interest payments. It’s important to do some calculations and see how a new loan will total in the long run. If your total interest payments are higher under a new loan term, you can try adjusting the monthly payment to help you become debt-free sooner.
You should also know the costs of changing lenders. There’s a number of associated costs when moving to a new lender such as bank fees, Lenders Mortgage Insurance (LMI) and stamp duty.
When closing a home loan account, there may be a discharge fee of about $100 – $400 or break fees if you’re ending a fixed rate loan before the end of the term. The new lender will also charge processing fees for the new application, property valuation and settlement. Total set up expenses may cost $300 – $1,000; standard valuation fee may cost $200 – $500 and if you’re staying with your lender but switching to a new product, you may also need to pay for a switching fee. Accrued lending fees when refinancing will be added to the new loan so it may be good to avoid paying interest on these and consider paying off any costs before they are charged.
Lenders look at the loan to valuation ratio to determine whether LMI is required for a new loan. You would need to pay LMI again if you’re borrowing more than 80% of the property value so to avoid it, your mortgage broker could arrange an upfront valuation of the property before you proceed with a refinance. If you’re increasing the loan amount with a refinance, you may need to pay stamp duty, which will be calculated in the new portion of the loan. Stamp duty may be payable as well if you’re changing the name on the title. It is determined by state so it’s good to talk to your mortgage broker about this.
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Choosing a new loan is more than finding the lowest interest rate. Loans come with different features that provide flexibility and help you pay off your mortgage faster. You may access some features like an offset account, unlimited extra repayments, free redraw and direct salary crediting depending on your loan and lender. You need to consider all these before signing up for a new loan. It’s important to do your homework and talk to your mortgage broker to make sure you’re getting the best deal.
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