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What not to do when refinancing your loan

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Nila Sweeney
With fixed rate loans dropping to levels below or equal to variable rate loans, there’s never been a better time to shop around for a new mortgage. When it comes to changing your mortgage, however, there is a right way and a wrong way to go about it.
 
Refinancing is a great way to access lower interest rates, more product features and better customer service.
 
There are many reasons why you might be considering it: if you want move to a new lender, for instance, or if you’re seeking to switch between variable and fixed rates.
 
However, you need to understand that refinancing isn’t simply a “tweak” to your existing loan. It involves a completely new home loan application and will result in a new entry on your credit report, even if you refinance with the same bank or financial institution,
 
So, before you fill out the paperwork and begin the process of moving your mortgage, be sure to ask the following questions so you don’t make any costly mistakes.
 
Q1: What is your motivation for refinancing?
If your aim is to consolidate you personal debts (such as credit cards, store cards, car loans and personal loans) into your mortgage, be careful, warns Margaret Lomas, director of Destiny Finance Solutions.
 
“People usually bundle to reduce their monthly commitment, rather than to pay down the debt more quickly,” she says. “Under those circumstances, it will greatly increase the amount of time you’ll take to pay off your home loan.”
 
Q2. Has your financial situation changed?
If your income or outgoings have changed for any reason, you may not have the same borrowing power today that you did when you first applied for your mortgage. For instance, if you’ve had a child since you initially obtained your mortgage, the lender will view your expenses as being higher, and your borrowing power may be lowered as a result. Credit card limits can also have a huge impact on your mortgage borrowing power, so if you’ve increased your Visa or Mastercard limits in recent years, it would be wise to reduce them prior to applying for your refinance. 
 
Q3. Has my credit rating changed?
Your credit rating is one of the main criteria that banks and lenders use to assess your application for finance. So, if there’s any chance that your credit history has been impacted by outstanding debts or financial difficulties you’ve recently experienced since you were approved for your current loan, you may run into trouble when trying to refinance. If in doubt, perform a credit check yourself prior to applying: you can request a free copy of your credit profile at www.mycreditfile.com.au.

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