your 5 minute guide to refinancing your home loan
22 November 2010
In the past years, many borrowers stuck with their home loan for the duration of their loan until fully paid off. However, with increased competition and many new lenders entering the market in recent years, borrowers are much more willing to refinance their loans for a number of reasons.
With some of the lowest home loan interest rates in years, many home owners refinance to get a better deal on their home loan. Switching to a lower interest rate can save thousands of dollars and years off a home loan, but it's important to take into account deferred establishment, exit, setup and other fees and charges associated with leaving your current lender and setting up with another. Often your current home loan provider will match another lender's rate, so your first port of call should be your existing home loan provider.
Another common reason people refinance their home loan is debt consolidation. Home loan interest rates are often well below those of other loans, such as credit cards, car loans and personal loans. By consolidating them into your home loan, this can significantly reduce the amount of interest owed on other personal debts. However, it's important to maintain the consolidated debt as a "split", separate to your original home loan - so that you can keep track of statements and repayments for all elements of a consolidated loan.
Equity is another common motivation for refinancing a home loan. With property prices appreciating significantly in recent years, borrowers can access equity in their property through a home equity loan to secure additional funds for anything from an investment property deposit through to home renovations. However, it's worth getting a few valuations done beforehand to ensure that the amount of equity in your property is worth refinancing.
Renovating is another common reason for refinancing home loans. By taking out a construction loan, you pay interest as renovations are gradually completed. Once building is complete, you can even refinance your home loan again and consolidate the amount from the construction loan into your home loan - minimising interest repayments while providing you with a degree of liquidity.
Another reason that some borrowers choose to refinance their home loan is to move from being a low documentation ("low-doc") to a high documentation ("high-doc") borrower. If you are able to provide a lender with one to two years' worth of bank statements, tax returns and other financial documentation, you are effectively demonstrating stability of income. The reason for this is that most lenders consider high-doc borrowers less risky, which can be grounds for refinancing your home loan at a lower interest rate.
Whatever the reason for refinancing your home loan, it's important to be clear on exactly why you are refinancing. Draw up a list of what you want in a home loan, as this helps you in deciding exactly what kind of loan and lender will meet your needs.
Probably the most important consideration in refinancing is cost. There are usually fees and charges for moving from one lender to another, so ask yourself whether the short-term loss is worth the mid- to long-term gain of refinancing. If it works out in your favour, you can save thousands of dollars and years off the life of your home loan.