5 questions to ask before refinancing

If you think that your home loan interest rate isn’t competitive enough or your financial situation has recently changed, you may be considering refinancing. Before you refinance, it’s important to understand the process and any implications that may arise. Lendi has compiled a few key questions to consider before you refinance:

1. Can I ask my lender to lower my rate?

You can definitely ask your lender for a lower rate. It’s a great idea to be regularly checking out what interest rates your lender is offering to new customers. If the new rates are better than your current rate, don’t be afraid to contact your lender and ask. Lenders often reward loyalty, so they are likely to offer you the improved rate if you’ve been with them for a couple of years and have a consistent repayment history.

2. Should I switch lenders?

If you are unhappy with how your lender operates, or you think you could get a better deal elsewhere, don’t be afraid to make the switch. It’s a good idea to compare your interest rate with a range of lenders, and not just your existing lender. You may be surprised at what deals are out there.

For example, online lenders tend to offer very competitive rates and unique loan features. Plus, with an online lender, you won’t be required to make any trips to the bank. Or, maybe you’d prefer a more traditional bank lender. Either way, with 35+ lenders, Lendi has you covered.

Want to see how your home loan rate compares to the rest of the market? Search home loans here.

3. How do I know if I’m switching to the right loan?

In general, when you switch to a new loan, you should be saving money or moving to a new loan that better accommodates your changing needs.

Prior to making the switch, it’s important to consider the reasons you are refinancing. If you are seeking out a better interest rate, make sure that the savings that you’ll make outweigh any potential refinancing costs.

If you refinance with your current lender, it may be a simpler process and you will generally avoid paying fees. Whereas if you refinance and switch lenders in the process, you might be hit with exit fees and break costs, depending on your loan type. Unlike fixed-interest rate loans, variable interest rate home loans won’t attract break costs, but both might still attract exit fees. Exit fees are only applicable to home loans entered into before 1 July 2011.

Your new loan should have minimum monthly repayments that you can comfortably afford. Refinancing can allow you to change your loan repayment term, but if decreasing your loan term makes it difficult for you to afford your repayments and general lifestyle, you might need to rethink things.

4. How much equity should I have in my home before refinancing?

Once you have at least 20% equity in your home, you will be in a good position to refinance. You may still be able to refinance with less equity, but you may be subject to Lenders Mortgage Insurance (LMI) fees. If you have no equity, or less than 5%, you might be able to refinance with a guarantor.

You can build equity in a number of ways:

• Make more regular repayments (e.g. weekly/fortnightly instead of monthly)
• Make extra repayments
• Use a redraw facility or an offset account to reduce your interest payable, but still have access to your extra repayments and savings
• Pay larger monthly repayments
• Renovate to increase your property’s value

Related: Equity home loans

5. Do I want to add any loan features?

The inclusion of certain features in a new loan when you refinance can improve your home loan experience. There are a range of loan features available, but some of ones you might like to look into include:

• Offset account: a type of savings account attached to your loan that can help reduce the interest charged on your home loan.
• Redraw facility: you have access to funds from any extra repayments that you make on your loan, while reducing interest charges.
• Loan portability: you can easily transfer your loan to another property when you buy and sell your home.
• Split loan: allows you to have part of your home loan charged with a variable interest rate and the other half charged with a fixed interest rate.

Some of these features are generally only available for loans with a variable interest rate. Fixed interest rate home loans are less flexible in that there is usually a limit to extra repayments made, and that refinancing before your fixed period ends could lead to break costs.

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The information in this post is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.