Refinancing your home loan could be one of the best financial decisions you ever make. We spoke about what is remortgaging or refinancing your home few weeks back.
From helping you consolidating your credit card debt to choosing a better home loan – refinancing your home loan can be surprisingly simple. However, before you make the decision, here are five things you should know:
1. Who should refinance and how does refinancing work?
Refinancing is when you take out a new home loan that enables you to pay off the existing home loan. In many cases the new home loan has been taken out with a new lender at a lower rate of interest
Refinancing is for people who already have a mortgage and are looking to change lender to gain access to a better interest rate or product features, or if you own the property outright and are looking to borrow against it.
2. Things to consider when making the decision to refinance
Your home loan is probably your biggest expenditure, so it’s only natural that you spend the time to take your current and future financial circumstances into consideration when deciding whether or not to refinance. Some of the main points should include:
Job security – Are you planning to become self-employed or is it likely that you may be made redundant and loose your job in the near future? If so, you should consider how much you would realistically be able to repay each month. Alternatively, if you have recently taken a new higher paying role, or accepted a promotion you may be able to start making larger monthly repayments.
Children / future children – Are you planning on having children in the near future? If so you need to consider the impact this will have on your personal finances. Are you children looking to go to university? If so, you may need to financially support them.
Bad credit history? – If you have bad credit history due to missing credit card, home loan or bill repayments then it is unlikely that you will be able to gain access to the most competitive interest rates on offer.
The size and term of your existing mortgage? If you are close to the end of your current mortgage then you may find that the added fees and charges associated with refinancing make it prohibitively expensive to make the switch to a new lender.
3. Have you compared all costs of the new mortgage?
When choosing a new home loan, make sure you review all the costs associated with making the switch – not just the headline interest rates. Before signing anything, stop and look at the fees and charges and compare them with your existing and new lender.
These fees could include:
- Processing fee
- exit fees
- establishment fees
- lenders legal charges
- any additional mortgage stamp duty
4. Don’t just look at the interest rate, consider the other product features
Yes, the interest rate is one of the main components of your new home loan. But, don’t forget to compare the features of your existing and new home loan, before making any decisions. Features to research include:
- Redraw facilities
- Ability to make additional repayments
- Options for repayment frequency
- Option to have an interest-only period
- Part payment fee and restrictions
- Pre-closure fee and limitations
- Late payment fee
5. Refinancing is not a quick fix for financial problems
If you are planning on using your home loan to consolidate outstanding debts then it’s important that you remember that it isn’t a quick fix option. Consolidating debts using your home loan can work for some people – if it means they end up paying less money in interest and fees every month.
However, you must be able to keep up with the repayments on the new home loan. Otherwise, you may be at risk of losing your home.