Refinancig  - Risks and Benefits

Before you decide to switch

Refinancing your home loan to take advantage of a lower interest rate might save you money.
However before you switch, make sure the benefits outweigh the costs.
T
here are other things to consider before switching.

We may ask your current lender for a better deal

To keep your business, your lender may reduce the interest rate on your current loan.

If you have at least 20% equity in your home, you'll have more to bargain with.
You can then  compare any loan they offer you with the other loans you're considering. 

 

Match the length of the new loan

Some lenders may only refinance with a new 25 or 30 year loan term.
You could end up with a longer loan term than the years left to pay off your current mortgage.
Especially if you are comparing an old 15yr term with a new 30 term.

The longer you have a loan, the more you'll pay in interest.
If you do decide to switch, you may want to get a loan with a similar length to your current one.

 

Weigh up the cost of lender's mortgage insurance (LMI)

If you have less than 20% equity in your home, you might have to pay lender's mortgage insurance (LMI).
This can increase the cost of switching and outweigh the savings you'll get from a lower interest rate.

If you decide to switch, ask for a refund of some of the LMI from your current loan.


Compare the costs of switching your mortgage

Get your broker to provide you with an estimate of costs.
These should include:

 - Exit Costs (to get away from your current Lender

 - Entry Cost (ie Application & Valuation fees etc)

 - Cash Rebates (some lenders may rebate you to refinance your loan

 - Government Fees (you may 

Pros:
  • Cheaper Interest, cheaper repayments, better loan features

  • Opportunity top access equity via a top up.

  • Keeps your current lender honest

  • Many lenders treat existing or new client better

  • Cash rebates may be available 

 

Cons:
  • Costs to Refinance can cost you.

  • You could end up paying more if the term increases

  • Avoid honeymoon rates and know what reverting rates are

Speak to your broker if you need to know more.