The benefits of loan refinancing.
In the past, most people who took out a mortgage doggedly continued with the same lender until they had paid it off – usually after a period of 20 years or more.
These days, people refinance their mortgage much more frequently. Despite most home loans having a loan term of 30 years the actual average duration of a home loan in Australia is now just 4-5 years.
Thanks to a highly competitive lending industry and a bit of government intervention refinancing has never been so easy.
That being said many people are still hesitant when it actually comes to switching their loans over to another lender.
The purpose of this post is to dispel a few common myths many people still believe about refinancing.
Refinancing Myth #1 – I’m already on a great deal with my bank!
It makes sense that you would always want to be paying the least amount of interest as possible, doesn’t it.
As a trusted mortgage broker and credit adviser it’s our job to make sure you get the best possible deal when you first take out your mortgage. However, new loan products come onto the market all the time and banks are constantly tinkering with their interest rates and offering specials to try and win more business. The lender with the best product and rate today is not necessarily going to be the lender with the best deal in a years time – that’s just how the market works.
Keep in mind that even if the products and rates don’t change that much you might change – that is your financial situation might improve such that you qualify for a better and cheaper loan. For example, a pay rise or paying off your credit card debt can significantly improve your borrowing power. Restructuring your loans and reducing your LVR to 80% or below will qualify you for a better interest rate, as will switching from a low doc to a full doc loan once you can provide 2 years’ worth of supporting financials [if you’re self-employed and run a business].
The truth is that unless you have someone regularly review your loans you won’t know if there’s a better deal out there for you.
And don’t expect your bank to see if there’s a way you can save interest by refinancing to another lender. They won’t even tell you if there is a better way of structuring your current loans with them to save money.
Which brings me to another important point about refinancing – if we find a better deal for you with another lender we will always give your bank the opportunity to match or better this deal prior to refinancing. It doesn’t happen often but when it does it’s a great outcome for the client as they get the deal they want without having to go through the process of switching lenders.
There are many benefits to refinancing or restructuring your loans – some of these include;
- A more competitive rate to help you pay off your loan quicker
- A more flexible loan that helps you reduce your interest costs each month
- Access to additional funds for things like home improvements etc.
- Debt management such as consolidating other high interest debts or loans into your home loan
For more info we wrote a comprehensive article on how you can better manage debt and save yourself hundreds of thousands and years off your home loan – you can read it here
Refinancing Myth #2 – It costs too much money to switch!
If you are switching from your current bank to a new lender, you may be charged fees for refinancing. It’s important to make sure that the long term financial benefits outweigh any upfront costs associated with refinancing your home loan.
Exit fees were previously a major deterrent from switching home loans due to the costs involved if borrowers wanted to either sell and finalise the loan early or simply refinance to a cheaper loan. However, as of July 1st 2011, the Federal Government stepped in and decreed that lenders no longer charge customers for repaying their home loan early.
Customers who wanted to switch from one home loan lender to another previously had to pay up to thousands of dollars in early exit fees [depending on the loan size and lender]. Now that these fees have been abolished, it’s much easier [and cheaper] for borrowers to jump ship from their current mortgage to a cheaper one.
Despite this new legislation it’s important to note there are still other costs involved in discharging a loan and setting up a new loan. In addition, if your current loan was arranged prior to July 2011 you’ll still have to pay exit fees when you refinance.
But it’s really quite simple – if there’s no real and tangible short-medium term financial benefit to refinancing your loan we just won’t recommend that you do it. Either you win or things stay as they are.
To see how much you can potentially save by refinancing and restructuring debts click here
Refinancing Myth #3 – Setting up new bank accounts and moving over all my direct debits and credits – what a headache!!
Plus did you know that since November 2008 banks have been required by law to provide all customers with an easy and painless ‘switching service’ when refinancing.
Most banks don’t open promote this service as it creates extra work for them. Instead they’ll encourage you to organise for all your automatic debits and credits to be transferred across to your new bank account. However, if you want you can get the bank to do it all for you!
Here’s how it works;
- Tell your new bank that you’d like to take advantage of their free switching service.
- Your new bank will then ask your old bank for a regular payment listing. The list shows all the organisations that have made direct credits, direct debits or periodical payments to or from your old account over the last 13 months.
- Your new bank will provide you with a copy of this list so you can decide which payments you’d like to switch across to your new bank account.
- Your new bank will then get in touch with your regular debtors [phone company, electricity provider, etc.] and creditors [your employer, share registry, etc.] and let them know of your new account details. You can even request that your new bank arrange to have your old bank account closed if required.
There you have it, refinancing can truly be a painless and profitable process.
As a general rule we recommend you have us review your loans every 2 years to ensure they remain best suited to your needs.
If you’d like to discuss your situation please don’t hesitate to contact us via phone or email.
P.S. You can see our variable and fixed rate specials here
Sam, Matt & Andy
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