Looking to refinance? Here are some important considerations

In 2020, 40% of the home loan applications we completed here at SW Brokerage were refinancing applications where we moved clients from one lender to another – to help them consolidate debts, complete renovation or reduce their interest rates to help increase their cash flow.

In 2021, with record low interest rates (some as low as 1.99% with certain bank products) more people are considering refinancing and some banks are even paying people to refinance.

In my 18 years of doing mortgages for clients I have never seen anything like this before. But it worries me that people are jumping ship for the sake of a $2000 – $4000 incentive to refinance, when there might be options that serve them better in the long term.

So before you refinance, there are a few things to consider.

Negotiating a lower interest rate with your current lender might be a better option

Before you go through the process of refinancing, speak to your mortgage broker about your home loan goals and which options will be best to support you in achieving those goals. They will help you go through your monthly budgets, and will negotiate with your current lender to see if a better rate is available.

In 2020 we saved our clients over $100,000 collective by asking the banks we positioned them with originally to consider a rate reduction. Don’t forget, keeping in touch with your broker is imperative.

Pay attention to the term of your home loan

When refinancing, your new lender may put you back on a 30 year term – which can cost you in the long run.

If you took out your home loan 5 years ago, you typically have 25 years left on the term of your loan. Typically when someone refinances the lender will look to extend that term back out to 30, resulting in more interest paid over the life of your loan (and possibly more fees).

So all the hard work you’ve done over the last 5 years is delayed. It may increase the surplus in your monthly budget (with repayments spread over 30 years instead of 25) – but if you don’t direct that surplus straight back into your home loan you could end up worse off in the end.

Jump on to our Mortgage Switching Calculator for more information.

Be careful locking in a fixed home loan rate

Last November, the Reserve Bank of Australia (RBA) slashed the cash rate to an all-time low of 0.1%.

The central bank then indicated that the rate would stay at that level for another two/ three years. This gives mortgage holders and potential home buyers a sense of certainty, but you need to be careful locking in this rate and the clauses that accompany such a decision. Remember with fixed rate loans you can’t pay the loan off quicker or make extra repayments (some lenders limit the amount you can pay off a year ie $10,000 a year), so even if your circumstances improve you are stuck with the same deal.

Refinancing can create significant opportunities for you to improve your long-term financial situation, but it’s important to be aware of the pitfalls. Speak to your mortgage broker to find the solution that suits your individual circumstances.

If you’ve refinanced and it’s created extra cash flow in your monthly budget it’s important to sit with financial professionals to discuss how you can use this to help increase your wealth in other areas. (We have a concierge program where we can recommend one of our business partners eg accountants, financial planners, stockbrokers and others – to help with all of your financial advice needs).