The Basic Guide to Refinancing

Refinancing your home loan can bring you substantial benefits. Work out whether it serves your needs.

"Refinancing" lets you change your home loan to suit your changed needs and better opportunities. As home loans have added extra features, more and more people have decided there's another product that would better suit their needs. (And services like eChoice make it even easier to arrange a refinance.)

How refinance works

You take out a new loan, and use some or all of the funds to pay out your existing loan. The new loan often comes from a different lender, but many people refinance with the same lender who they've been using for years.

If you move to a new lender, that lender will take care of the process of paying out your existing loan.

Why you'd Refinance

Most people refinance for one of the following reasons:

* You want to renovate your home
* You want to pay off debts quicker and cheaper by rolling them into your home loan
* You want to get a cheaper rate, even if it means giving up a few loan features
* You want to raise cash for a purchase
* You have money earning interest and you want a home loan that will apply that money to your loan - an "all-in-one" account
* You are currently paying a high interest rate - for instance, if you arranged a low-start, rising-rate loan from your homebuilder
* You want to switch from a fixed rate to a variable rate, perhaps because you can accept the risk of higher repayments
* You want to switch from a variable rate to a fixed rate, perhaps because you need the certainty that your repayments will stay the same for the next three years

How to Approach Refinance

You should start your refinancing with clear goals, whether they be to cut your repayments, free up cash or improve your home. Experienced loan brokers say that many refinance troubles start with borrowers who are refinancing without knowing why they're doing it.

Know the Costs of Refinancing

Application fees, stamp duties, discharge fees and mortgage insurance are just some of the costs you need to understand as you refinance.

Refinance almost always costs you money at the start - normally more than $1000 and often more than $3000. You will pay for:

* Mortgage insurance, usually payable when you borrow more than 80 per cent of the value of your property. Mortgage insurance will often cost more than one per cent of your property value. And it doesn't insure you - it insures lenders against the risk that your may not be able to repay your loan.
* Application, documentation, settlement and handling fees, charged by most lenders. These can reach $800.
* Early repayment fees, often charged if you repay your loan before it was due to finish. These vary widely according to lender.
* Valuation fees still charged by some lenders. These have often reached $200.
* Discharge fees on your existing mortgage (around $50-$200).
* Registration fees on your new mortgage (around $50-$100).

In some circumstances, state governments will charge stamp duty on your new mortgage . This will add around $50-$100 to your refinance bill in Victoria, NSW, Tasmania, WA and SA.

Many borrowers pay an invisible cost for refinancing - the extra interest which they pay for taking longer to pay off their loan. For most people, most of the time, the cheapest loan is the one you pay off fastest.

The Right Ways to Refinance

Here’s how to make sure refinancing leaves you better off – and a list of traps to avoid.

1. Pay off debts quicker and cheaper by rolling them into your home loan

Right way: make sure your new loan repayments get your loan paid off as quickly - or even faster - than the previous smaller home loan did.       

Wrong way: roll smaller debts into your home loan, but extend the term of your home loan - so that you are effectively paying interest on small debts over 30 years, instead of the previous one or two.

2. Create an "all-in-one" loan that lets you apply all your spare money to repayments

Right way: have your lender do the calculations that show you'll come out ahead - usually because you have $10,000 or more sitting in your bank account.

Wrong way: jump into an all-in-one loan that actually costs you money because you pay higher interest than you would on a basic, no-frills loan.

3. Change from fixed to variable rate, or vice-versa

Right way: decide how much financial uncertainty you can stand, knowing that fixed rates tend to be slightly higher on average and that switching loans has a cost.

Wrong way: switch from variable to fixed or fixed to variable because that type of rate is falling fastest at the moment - then wonder why you did it when rates change again.

4. Raise money to buy a car, finance a business, take a holiday or achieve some other goal

Right way: identify how much you need, and set a repayment schedule that will pay off the larger loan in the minimum of extra time. Wrong way: borrow more than you need and end up facing repayments you cannot afford - leaving you on a downward spiral and needing to refinance again.

5. Get a cheaper rate

Right way: move to a loan with fewer fancy features such as "offset", but which still allows you to make extra repayments and redraw later.

Wrong way: change to an identical product from another lender just to save 0.1 per cent on your loan, so that you're actually worse off after accounting for fees and charges.

6. Save money

Right way: keep your home loan at less than 80 per cent of your home's conservative value, to avoid costly mortgage insurance.

Wrong way: do a refinance deal wthat gives you relatively little benefit but pushes your loan value above 80 per cent of your home's value - so that you pay $1000 or more for lender's mortgage insurance

Disclaimer:

No investment advice provided to you.
This web site is not designed for the purpose of providing personal financial or investment advice. Information provided does not take into account your particular investment objectives, financial situation or investment needs.

You should assess whether the information on this web site is appropriate to your particular investment objectives, financial situation and investment needs. You should do this before making an investment decision on the basis of the information on this web site. You can either make this assessment yourself or seek the assistance of any adviser.