Switching to a new loan or moving to a new lender may seem like an easy way to reduce your mortgage repayments, but be careful - the shift can be costly.
When you first took out your home loan, you may have sought out the most suitable mortgage for your needs at the time, but if your needs have changed over the years, it may no longer fit the bill.
There are plenty of reasons why people refinance their home loans, but before you think about making the switch, you need to make sure you consider the move from every angle, says Frank Knez, Associate Director of Product & Marketing at Hemisphere Financial Solutions, a non-bank lender backed by RESIMAC Limited.
The reason for this is that refinancing is not simply about tracking down a cheaper home loan. Rather, you should take into account your entire financial situation and your goals, so you can be sure you’re refinancing for the right reason.
Before you make the switch, Knez suggests you take into account the following three key considerations:
Consideration #1: Research
For many people, the primary reason they seek to refinance is to access a cheaper rate, but a lower interest rate isn’t always reason enough to move – particularly if the ongoing fees on the new loan are higher.
Ask yourself why you want to refinance, and then “do some research on the new loan to ensure that it meets your needs, and to make sure you really are benefitting from the refinance,” Knez says. “For instance, look for lower repayments, better rates, less fees and/or more features.”
Consideration #2: Costs
It’s important to check the conditions of your existing loan to determine what the costs of refinancing will be, once you factor in any fees you’ll incur by closing your current mortgage.
“Factor in exit fees or deferred establishment fees, break costs if you’re in a fixed rate loan and discharge fees,” Knez explains. “Even with these fees the new loan may still be a better long term option, however this should be analysed beforehand and not just taken for granted.”
Consideration #3: Debt consolidation
Debt consolidation is often a driver behind people’s decision to refinance, as it presents an opportunity to repackage your existing home loan together with other debts, such as credit cards and personal or car loans.
“This can benefit you by reducing your overall monthly repayment amount, as well as allowing you to move to a better priced home loan,” Knez says. Just make sure you cancel your credit cards and close any personal loans as soon as you refinance, so you don’t rack up fresh debts once you’ve cleared the deck!