Now that you’ve decided to refinance it’s time to get down to business. By following a few simple steps, you’ll be getting a better deal in no time.
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This one seems like a no-brainer, but it’s amazing how many people don’t really take the time to think about the cost of their home loan. In fact, a UBank survey in February 2017 found that 85% of homeowners didn’t know their current interest rate. While 44% of them could give a rough estimate of the rate they were paying, 41% didn’t have any idea at all.
In other words, if you haven’t kept track of what you’re paying for your home loan, you’re not alone.
So the first order of business if you’re thinking about refinancing is to look at how much you’re currently paying. Your interest rate should be listed on your home loan statement. If your lender has online banking, you should be able to use it to find out your current rate in your account information.
If you can’t find your statements and you don’t have access to Internet banking, you might also be able to check your rate using your lender’s website. If you know what home loan product you have, you can check your lender’s current rates for the product and it should tell you what you’re paying. Of course, this won’t work in the case of fixed rates. If you have a fixed rate loan, you’ll be paying the rate that was on offer when your home loan settled rather than the rate that’s on offer now.
If all else fails, you can call your lender to find out. But you’ll need to have some account information handy, such as an account number or customer number. If you do end up having to call your lender to find out your current rate, don’t feel badly. Contacting your current lender is a crucial step in the refinancing process, as you’ll soon see.
There’s one last word on checking in on your current home loan. Make sure you find out about any ongoing or annual fees you’re paying as well. These will factor into your calculations when you work out how to get yourself a better deal.
One big step many people miss in the refinancing process is talking to their current lender about getting a better rate. But this should always be one of the first steps you take, because your lender is highly motivated to keep you. In fact, they have entire teams devoted solely to keeping you as a customer.
In general, it costs a bank much more to bring in new business than to retain old business. Your current lender doesn’t want you to leave, because after paying your home loan for a few years
you’re a more profitable customer than a brand new home loan customer.
You can try to get a better deal in a couple of different ways. One way is to just ring and ask. Tell them you’re thinking about shopping around for a new home loan provider, and ask what kind of deal they’re willing to offer to make you stay. It’s likely they’ll be willing to negotiate to keep your business.
If you have a flair for the dramatic, another way to get a better deal is to call and tell your current lender that you’re refinancing your home loan with another provider. You’ll either be transferred directly to the retention team, or you’ll get a call back from them within minutes.
While you might not have thoroughly researched all your home loan options at this point in the refinancing process, it is good to have a rough idea of some of the rates on offer. If you can quote your lender a lower rate you’d like to be paying, you have a point at which to start your negotiations.
There are a couple of caveats to this step, however. First, you’ll want to make sure you’re the kind of customer your lender actually wants to keep. In other words, you need to have made all your repayments promptly.
Second, you need to be ready to follow through on your threat to refinance with another lender. If your lender calls your bluff and either won’t budge or won’t offer a rate you’re happy with, you should be prepared to make a switch.
Finally, even if your current lender offers you a better deal, you should still do the kind of thorough research laid out in the steps ahead, to make sure it makes sense to stay with them instead of finding a better deal somewhere else.
As we discussed in a previous chapter, there are some costs associated with leaving your current lender.
Almost every lender will charge you a discharge fee. This usually isn’t more than a couple of hundred dollars, so it shouldn’t seriously eat into your refinancing savings. But you should still check to see exactly how much you’ll be paying.
If you’re in a fixed rate home loan, you’ll need to check the break costs for leaving your loan before the term is over. These can run into the tens of thousands, but could be as low as a few hundred dollars. The best way to find out is to simply call your lender and ask.
You’ll also want to figure out if you’ll be forced to pay lenders mortgage insurance (LMI) again. If the equity you have in your home is less than 20% of its value, you’ll most likely have to pay LMI again. If you do have to pay LMI, Genworth has a handy calculator that can give you an estimate of what you’ll be paying.
Now it’s time to take some real action. Use finder.com.au and the table below to compare some of the best rates on the market. Right away you’ll probably find a number of lenders with significantly cheaper rates than you’re currently paying.
But it’s important to compare beyond just the headline rates. The rates you see in the table below will give you a really good idea of some of the lenders worth a closer look. Once you take that closer look, pay attention to the interest rate and the following factors:
This is one of the most important issues. High annual or ongoing fees could eat into the value you get from a new lender. Not all fees are a deal-breaker, of course. For instance, some package loans charge an annual fee, but give steep rate discounts and waive other fees.
To get an idea of whether the fees associated with a new lender are too high to make refinancing a good idea, take a look at the comparison rate. The comparison rate takes into account fees and charges, along with the interest rate.
Now, the comparison rate you see advertised can change based upon the amount you borrow. But if you go to a lender’s website, you can generate a Key Facts Sheet based on your own borrowing circumstances which will give you a personalised comparison rate.
Remember to compare home loans by examining the features they offer, since some of these features can help you shave years off your home loan. Some features you might look for would be:
- An offset account. As we discussed previously, an offset account can help you pay your home loan off faster by reducing the amount on which interest is calculated. An offset account can save you tens of thousands of dollars in interest and take years off your home loan.
- A redraw facility. A redraw facility allows you to withdraw any extra repayments you’ve made as you need them. This is handy if you face some unforeseen expenses.
- A split facility. A split facility lets you divide your home loan between different products offered by the lender. For example, you could have a portion of your home loan on a variable rate and a portion on a fixed rate.
Just remember, some of these features also come with fees. When comparing home loans, it’s important to think about the features you think you’ll use, and what you can do without. A fee is worthwhile for a feature that helps you pay your loan off faster or take more control of your finances, but if you don’t think you’ll use a feature there’s no sense paying for it.
The best mortgages for most borrowers also offer you flexibility and let you manage your home loan in the way that’s best for your specific circumstances. Some of the flexible options you might want include:
- Extra repayments. Look for loans that give you the option of making additional repayments. This will help you pay off your home loan faster, and allow you to devote any extra cash you have to your mortgage. Most variable rate loans allow unlimited additional repayments, while most fixed rate loans cap extra repayments at a certain amount.
- Repayment types and frequencies. Many loans allow you to set up your repayments on a schedule that’s most convenient for you. You can choose to repay weekly, fortnightly or monthly. Look for providers that offer this flexibility. Also, some loans will allow you to choose between paying both the principal and interest or, for a set period of time, just the interest. Investors often choose interest-only repayments to maximise their cash flow while minimising their expenditures.
- Portability. If you end up moving house during the term of your loan, some home loans will allow you to transfer your loan to your new house. This can be a great feature, as it means you won’t have to go through the application process again. There is often a fee involved with moving a home loan from one property to another, but it’s much less expensive and time-consuming than getting a new home loan.
Once you’ve looked into the rates, fees, features and flexibility of different home loan products and narrowed down your search, it’s time to weigh up the cost of switching lenders.
You should have already calculated the cost of exiting your old lender. Now you’ll want to look at the up-front costs of moving to your new lender.
As we discussed before, there are a few common up-front fees you might be asked to pay. You may be charged an application fee, a settlement fee and a valuation fee, to name a few.
When you’re looking into these fees, also pay attention to any promotions lenders are running. Lenders love to get refinancing business from another lender. They’re usually profitable loans at lower LVRs from borrowers with a proven repayment track record. Because they’re highly motivated to get this business, lenders will sometimes run special deals where they waive fees for refinancers, or even offer to pay clients some of costs associated with leaving their current lenders.
Once you’ve worked out the costs of leaving your old lender and the costs of moving to your new lender, you should get a good idea of how much you’ll actually save by switching. You should also be able to identify the lender and home loan product that will deliver the biggest savings.
Now that you’ve found the home loan that’s going to give you the best deal and the biggest savings, it’s time to apply. Different lenders will have different application processes, with some taking place entirely online and some requiring you to mail or scan and send forms and documents. In general, though, there are few details you’ll need to have ready:
- Personal information. You’ll need to provide your name, date of birth and contact info. Also, you’ll be asked to produce a valid ID, such as a driver’s licence, Medicare card or passport.
- Financial information. You must provide details of your employment, income, assets and liabilities. Lenders will want documentation on this, so you’ll need to have payslips and bank statements ready.
- Loan information. Details of your current home loan are required, so your lender can see your repayment history and outstanding loan amount.
- Property information. Your new lender will need details about your current property. They’ll want to have a valuation done to assess its current value so they can determine how much to lend you.
Once you’ve applied, approval generally takes anywhere from a day to eight business days. With some online lenders, it can take just minutes or hours.
This is the easy part. Your new lender will communicate with your old lender to discharge you from your old home loan. They’ll exchange all the necessary documentation and take care of things like the title transfer for you.
Once this is done, your new home loan will reach a stage called settlement. This is when the actual funds are disbursed to pay out your old home loan. If everything goes according to plan, you should be able to get from application to settlement within a couple of weeks.
And that’s that. Congratulations! You’ve successfully refinanced your home loan. Now just make sure to do a health-check on your home loan every 18 months or so to make sure you’re still getting a good deal. But for now, pat yourself on the back. You’ve likely saved yourself a massive amount of money.
The whole refinancing process takes a little time and a little research, but it’s pretty straightforward for most people. Unfortunately, this isn’t always the case. For some borrowers, refinancing can be a bit tricky. In our final chapter we’ll discuss what to do if you find yourself in a difficult refinancing situation.
Check out the other parts in this guide
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