Home Loan Refinancing is the most popular (and ever growing) loan type in Australia's Home Loan marketplace. In fact one recent study found that refinancing accounts for 34% of all mortgage applications lodged in Australia.
But what is it that makes refinancing so popular? What traps do you need to be aware of? And when is it the right option to refinance?
Lets start with the Reasons Why borrowers choose to refinance there Home Loans:
Debt Consolidation - probably the most common reason, it basically means you roll all of your expensive debts (credit cards, personal loans etc.) into a new Home Loan. This action clears the expensive debt, lowers the interest rate payable and in most cases significantly reduces your total monthly loan repayments.
Change in the borrowers circumstances - such as starting a new family or getting a new job.
To access extra funds - this is made possible through the equity which has built up in the home. These funds are commonly used to buy a new car, take a well earned vacation, home renovations, for an investment property, buying shares or paying for education.
If for whatever reason they are unhappy with their current loan or lender.
To change the term of the loan - the borrower may now be in a position to make extra payments and wants to utilize an accelerated payment schedule.
Simply to take advantage of a cheaper, more suitable Home Loan Package.
Switching from a variable interest rate loan to fixed, or vice versa.
The Costs Associated with Home Loan Refinancing
Unfortunatly the biggest cost to the borrower when refinancing is often time and stress.
As far as fees and charges go, it differs depending on where you are located in Australia, but on an average size Home Loan ($215,000) the cost of refinancing is about $1,000. Borrowers usually roll this expense into their new Home Loan so they don't have any "out of pocket" costs.
Some of the expenses you'll encounter when refinancing:
Discharge fees to exit your old loan
Registration fees for the new mortgage
Loan Stamp Duty
Account fees
Lenders Mortgage Insurance
Valuation fees
Early loan repayment fees
Is Refinancing Right For You?
Now we've established why borrowers refinance and what it costs, we still need to determine if it is the right course of action for you. I would suggest you write down the exact reasons you are considering refinancing and then do some research, this ensures you make an informed decision. Some valuable tools for this research are a refinancing checklist and a Home Loan Repayment Calculator which can be accessed at www.mortgagechoice.com.au/cheltenham1
CAUTION: Beware of the dangers of unnecessarily refinancing or "churning" your mortgage. This practice is often more beneficial to the lenders and mortgage brokers than to the borrower. This is why it is crucial to do some of your own research, so you can fully understand exactly why you are refinancing and how it will benefit you.
Always keep in mind that it is overall savings and loan suitability which are the most important factors in refinancing (especially Debt Consolidation Loans) - not just a lower interest rate.
Chris Smith works with Mortgage Choice in Australia. For further information and refinancing tips please visit http://www.mortgagechoice.com.au/cheltenham1.
