For many consumers, the great dream is to own a property. With some hard work, savings, effort and determination, it is possible for many to achieve that. Whether it's an apartment, unit, townhouse or standalone home – home ownership is possible.
For a great majority of homeowners, however, buying a property means taking out a mortgage or a home loan. This is when a bank lends you the principal for the purchase, which you pay back over decades (typically three of them), with the property acting as security for the loan. But like insurance, telco companies and utilities, loyalty doesn't pay when it comes to a mortgage. And if you are currently a homeowner and feeling a little disillusioned with your current mortgage rates, you may be considering refinancing your home loan to secure a better deal.
Before taking that step however, there is much to consider. Thankfully, we'll discuss what’s involved in refinancing your home loan in this helpful article, so read on to learn more.
Calculate Your Repayments
When you refinance, the bank that is offering you a product should be able to give you an indication of the interest rates that are available to you. You should use an online mortgage repayment calculator to figure out the cost of your repayments alongside looking over any information provided by your mortgage lender. These valuable tools allow you to input the loan amount, the interest rate, the duration of the loan, repayment frequency and the time remaining on the loan. It will then calculate your repayments in a very accurate manner.
Third-party mortgage repayment calculators may also help you with your budget as well as in determining if the refinancing package is worth your while. So don’t hesitate to run your own calculations with these independent tools when looking to refinance your home loan.
Better Interest Rate?
The main goal of refinancing your home loan is to lock in a sharper interest rate. With consecutive interest rate rises occurring in virtually every country around the world, it goes without saying that securing a lower interest rate is a significant goal for many people looking for a better deal on their home loan. A better interest rate can save you thousands of dollars throughout the lifespan of your mortgage.
And don’t disregard the power of decimal points here either! Even a 1 or 0.5% difference can mean significant savings on a home loan worth hundreds of thousands of dollars. When shopping for a better home loan, compare the interest rates of different lenders and pick the lowest one.
Credit Score and Checks
Refinancing will require a credit check and can impact your credit score. Your credit score is a rating of how “credit worthy” you are, and can help lenders determine the possibility of you making repayments or even defaulting on a loan. The higher the rating or score, the better your eligibility for a loan.
When applying for refinancing, the lender will calculate your income, expenses, and check your credit score. Several factors can impact your credit score, including if you're successfully repaying other personal debts, such as credit cards and personal loans.
Another factor to consider is your employment type, as this can impact your lending suitability. For instance, full-time employees typically can access finance more easily than those employed casually or who run a business. If you have a stable credit history, this should not have a negative impact on you, but it's worth knowing this when approaching your refinance.
Fixed or Variable Rate?
Another factor to consider when refinancing is whether or not you will choose a fixed or variable interest rate for your new home loan package. A fixed rate is usually for a period of one to five years, which means that your interest rate won't change within that period. A variable rate will change depending on impacts on the cash rate set by your country’s reserve bank. This means that your repayments will go up or down depending on the interest rate.
Some banks will offer you a choice to split your total home loan amount between fixed and variable, with one portion being fixed and the other being variable. Depending on the available interest rates, it can be strategic to choose either a fixed or variable rate when refinancing your mortgage.
Loan Packages and Offers
Mortgage holders who are looking to refinance are basically prospective customers for mortgage lenders. For that reason, lenders will often have enticing offers to attract new customers looking to refinance. These offers can vary but sometimes include cashback offers, rewards such as frequent flyer points, fee-free credit card transaction accounts or other offers.
Depending on your family's financial goals, taking advantage of a special offer can be advantageous. But just make sure that you don’t get distracted in the process of sifting through packages and special offers. It’s best to stay focused on the priority behind your refinancing efforts, which is securing the best rate for your home loan.
Fees and Charges
When refinancing, it's worth investigating all the fees and charges associated with changing lenders. For instance, your current lender may charge you a discharge fee for leaving, and the new lender may have upfront fees charged to onboard you, which can be incorporated into your new loan. These fees can range into the thousands. So, it's worth having a comprehensive understanding of the implications of refinancing, and ensuring you can provide all the documents requested to prove that you can pay back a loan before you make a final decision. It’s all about doing your due diligence and making sure that the new loan you’re applying for actually delivers on any promises of savings that it may make.
This informative article has covered what to consider before refinancing your home loan. We've covered interest rates, repayments, credit scores and checks, and the difference between a fixed and variable-rate home loan. Now, you can make an informed decision when it comes to your home loan options.
Aidan has been writing about personal finance for over 6 years. Prior to this, he worked as a Corporate Finance Analyst where he specialized in Due Diligence, Company Valuations and more. He is a CFA charterholder.
