Signing up for your first home loan can be confusing, with many mortgages getting more complex. Picture: iStock
Signing up for your first home loan can be confusing, with many mortgages getting more complex. Picture: iStock

Five things you must know before refinancing

HOME loan customers looking to refinance to snare a better deal need to consider five important factors before jumping ship.

The Reserve Bank of Australia board has kept the cash rate on hold at 1.5 per cent today - it hasn't moved since August 2016 - but it shouldn't stop borrowers from sniffing out better deals.

Here are five things to consider before signing the dotted line with another financial institution.

1. CHECK YOUR RATE

Check to see what interest rate you are paying.

New data from financial services firm Canstar shows 45 per cent of borrowers have no idea what they home loan rate they are paying.

Financial comparison website RateCity's spokeswoman Sally Tindall said there are plenty of razor-sharp deals available and lenders are hungry for new customers.

"For an owner occupier customer paying principal and interest they should be aiming for an interest rate under 3.8 per cent," she said.

''Find rates that are lower and more competitive."

RateCity's database found the cheapest interest rate available is by Reduce Home Loans at just 3.44 per cent.

2. ARE YOU ON A FIXED RATE?

If you're locked into a fixed rate home loan your bank will be happy with that - it's much harder and more expensive for you to switch.

But if you do decide to jump lenders and you're locked into a fixed rate you'll be hit with charges including break costs.

You need to find out what these are and whether it's worth moving lenders.

3. FEES

Once your lender gets wind that you're moving to another financial institution there's a very good chance they'll try and talk you out of it.

They don't want to lose existing customers.

This is when they reel off all the nasty fees that come with refinancing, including discharge fees, break costs and upfront fees with the new lender, just to name a few.

Ms Tindall said it's then up to you to do the maths.

"Sit down and crunch the numbers working out the difference in the rate and the fees because there's no point refinancing if it's going to send you backwards."

Owner occupier home loan customers paying principal and interest should be aiming for an interest rate below 3.8 per cent.
Owner occupier home loan customers paying principal and interest should be aiming for an interest rate below 3.8 per cent.

4. GET HELP

For some borrowers this may all sound too hard, so don't be afraid to ask for a helping hand.

Home Loan Experts' managing director Otto Dargan said engaging a mortgage broker can cut down the grunt work.

"Home loans are far more complex than they used to be," he said.

"Mortgage brokers are great at identifying your specific needs and long term objectives and then recommending a small number of loans that suit your needs.

"There's literally thousands of products out there and many have hidden catches that borrowers aren't aware of."

5. LOAN TERM

When most borrowers sign up to a mortgage it's usually for a 30-year term.

But when you're refinancing there's a good chance you're already a few years into the loan term and have made some good headway.

So Mr Dargan said when refinancing, "consider having a shorter term than the standard 30 years."

"Otherwise each time you refinance you extend your loan out," he said.

He also suggested another alternative - taking out a 30-year loan term but increasing your repayments so you pay off the debt more quickly.



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