The festive season is a great time to reset and create goals for your next year, and for many Australians, refinancing their mortgage may be at the top of their new year’s resolution lists.
Whether you’ve spent the last year listening to experts suggest interest rates may rise, or the financial pressures of the pandemic have you looking for ways to reduce your household expenses, 2022 may be your year to refinance your mortgage.
Let’s explore how you can avoid the common traps and pitfalls of switching home loans and find your best new mortgage option.
The costs of switching your home loan
Keep in mind that refinancing a mortgage can cost you in more ways than just money. It’s important to be aware of all the costs associated with refinancing before you take the plunge.
- Switching fees– This can include upfront fees with the new lender, such as application fees and establishment fees. If you’re refinancing from a fixed rate home loan, you may need to pay an early exit fee/discharge fee
- Loan term extensions – Another trap some homeowners can fall into is refinancing and extending their home loan term. For example, if you’re five years into a 30-year mortgage, and refinancing to a new 30-year mortgage, you’ve extended your original loan term by another five years. This could cost your thousands of dollars in additional interest charges
- Time and effort – Research data shows that 40% of refinancers see that the time and effort associated with refinancing is one of the biggest barriers to the process. It’s worth being realistic that switching your home loan lender will involve some time in terms of research and waiting for valuations, as well as effort in terms of organising your paperwork, or even boosting your credit score before application. However, using a lending specialist to help with your research and put the best options in front of you can really take away your time and effort.
While it is crucial you understand some of the traps associated with refinancing, it’s worth keeping in mind that the potential savings of time and money generally outweigh these costs.
Steps to refinancing your home loan in 2022
- Identify your goals
The most common reasons homeowners look to refinance generally includes:
- To nab a lower interest rate
- To pay lower fees
- To free up equity in the property
- To consolidate debt
- To add features to the home loan (offset account, redraw facility and more)
For refinancing, take time to consider which new home loan and new lender may best suit your financial situation and line up with your refinancing goals. A lending specialist is best suited to help you with knowledge and access to tools to not only help you choose the right home loan, but to make sure your loan application goes smoothly.
- Eligibility criteria
Just like when you applied for your current home loan, you will need to meet specific eligibility criteria, such as a loan-to-value ratio requirement, with a new lender to gain approval for your new mortgage.
Take some time to look at the requirements set by the new lender and assess your current financial situation, including your credit score, any existing debts, and your income levels. If there are areas you need to work on, such as paying off a car loan, consider doing this first to boost your chances of loan approval.
Once a lending specialist has helped you choose a new lender and you’re all set to meet the lending criteria of the new mortgage, it’s time to get your paperwork ready. Gather the personal identification and income verification documentation you may need ahead of time to make the application process as painless as possible. At LJ Hooker Home Loans for example we use a “get to know you process” and then help you gather all the required paperwork for the loan application.
This is where a lending specialist does all the work for you. They know lenders back to front so will package up your home loan in the right way, and then work with the lender to get your application approved. They will also organise a valuation on your property upfront (for free in most cases).
- Refinancing approval
A new home loan lender may take anywhere up to 7 days to approve your refinancing application. Once your application has been approved, the new lender will begin the transferral process with your existing lender. Your lending specialist will go over your new loan contract with you to make sure everything is correct he way you want it!
Congratulations, your loan has been approved. Now your old home loan lender will transfer the property title and mortgage debt to your new lender, which may take 1-2 weeks to finalise.
Is 2022 the right time to refinance?
While the Reserve Bank of Australia (RBA) has kept the cash rate on hold at a record low of 0.10% since November last year, that hasn’t stopped interest rates from having a rollercoaster of a year.
In the last two months alone, the big banks and most major lenders have hiked their fixed rates three to four times, seeing the end of the rock-bottom, below-2% fixed rate era. This may be due to some financial experts tipping that the RBA cash rate may rise as early as 2022.
Arguably the most popular reason to refinance a mortgage is to switch to a lower rate and/or lower fee lender. And for many mortgage holders, locking in the lowest rate possible is the goal. But as you can see, it’s seemingly impossible to predict if, and when, lenders may move interest rates out-of-cycle with the RBA.
Ultimately, the decision to refinance is highly personal and depends on your financial situation and budget. But it’s worth keeping in mind how the cash rate may move in the future, particularly if you want to lock in a lower interest rate.
Finding how you can use your equity, lower your repayments, or pay your home loan off sooner via a refinance is easy. Our lending specialists have access to a wide range of home loan options and are available for a no obligation chat via phone, web, or in person.
Simply contact us below and we’ll be in touch.
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This article is prepared based on general information. It does not take into account individual financial objectives or needs and is not financial product advice.