Should You Refinance or Get a New Mortgage?

You’ve probably heard offers, such as “Lock in a lower rate if you refinance” or that you can save when you refinance now. Wherever you go, you will find these ads and claims about mortgage refinancing. With the Reserve Bank of Australia (RBA) announcing astonishingly low rates, it has become more convincing than ever to get a loan. But the main question is this: should you refinance your existing loan, or is it better to apply for a new one?

The interest rate shift is a part of the country’s effort to boost the Australian economy amidst the coronavirus pandemic. Lower interest is certainly attention-grabbing but refinancing may not be the most suitable option for you. After all, you can potentially take out a new loan and even get a better offer.

With rates going lower than ever, it makes sense to take the time to see if you will end up in a winning situation. We strongly urge you to consider the most viable options and with the help of a broker; discover and review the best possible long term outcomes for your individual circumstances.

Gavin working on a home loan with a client.

 

Do The New Low-Interest Rates Mean Anything for You?

If you have already been deliberating on refinancing, you will most likely think that these lower rates have come at the perfect time. Just a one per cent drop in the interest rate can already make a massive difference in your monthly budget. Plus, it will allow you to pay off the mortgage loan faster.

The current cash rate still sits at a historic low of just 0.25%. It has been the same since March this year. This low rate makes people believe it’s the prime time to refinance their current mortgage term and switch to a 15-year fixed-rate mortgage.

What Does Refinancing Mean?

Before you refinance your mortgage, it is wise to ensure you understand what this term means exactly. To put it simply, refinancing is about getting a new mortgage – after you have paid off the existing loan amounts.

So no, it does not mean that you will have two mortgages. Instead, it’s much like your first loan has been paid off through refinancing. The second loan, on the other hand, is created to take its place.

Top Reasons to Refinance Your Mortgage Loan

Homeowners choose to refinance for a variety of reasons.

But the most common ones are:

  • Obtain a much lower interest rate
  • Make the mortgage term a lot shorter
  • Switch from a variable-rate to a fixed-rate (or vice versa)
  • Consolidate debt
  • Use home equity to fund a financial emergency
  • Make an investment or pay for a large purchase

The competition between home loan lenders has gotten severe over the past few years. Consumers should know how to take advantage of the situation. Let us say that you currently have an investment property in West Perth. And you have another mortgage for your home in the south. You pay for both these loans under one lender.

So, you begin to explore your options. You may have found out about refinancing and found that the cash rate went from 0.75 to 0.25% due to the pandemic. It means that banks and lenders offer low rates as well. After getting approved and refinanced your loan, you now save a total of 1.4% for both loans. It’s already a massive reduction, so this option certainly worked in your favour.

 

Gavin shaking hands with a client over a home loan.

 

What to Consider Before Refinancing Your Mortgage

According to the Australian Bureau of Statistics (ABS), over 33,000 Australians refinanced their mortgages amounting to $15 Billion Dollars worth of Mortgages in May this year, which is about 25% higher than April’s numbers. But does it mean you should do the same? We are almost at the end of the year, and it may make sense for you to refinance rather than get a new loan.

If so, here are some factors to think about:

  • Is Your Current Lender Willing to Give You a Better Deal?

Many homeowners are afraid to ask their lender to get a lower rate. But it would help if you told your lender that you plan to switch to a much cheaper offer. Lenders know that it is good for the business to keep customers like you – especially if you have a good credit standing. Therefore, they may reduce your current interest rate to make sure you stay with them.

If you have at least 20% home equity, you have an even bigger chance to score that deal.

  • Will You Be Able to Negotiate the Term of Your New Loan?

Typically, lenders will only allow you to refinance if the loan will take at least 25 years. If this is the case with the loan that you are eyeing, then it’s not a good idea. Chances are your current loan will be much shorter than the new one. If you take out the new loan, you have more years left to pay. Longer terms mean more interest. If you could negotiate with the lender to give you a shorter duration or at least similar in length with your current one, go for it.

  • What About the Lender’s Mortgage Insurance?

You will have to pay the LMI if you do not have 20% equity in your home. Therefore, the cost of switching is not worthwhile because you end up paying more.

Before refinancing with another lender, ask about the average interest rate, fees, and charges first. The best way for you to save time and effort here is to hire a mortgage broker.

 

Quantum Finance Australia business card.

 

Making a Choice – Refinance vs New Mortgage

It’s indeed a great time to refinance a loan and even take out a mortgage loan. With low-interest rates available, you can truly benefit in the long run. Be sure, though, that you actually submit an application. Some companies will overstate their published rates to slow down the number of people swarming to take advantage of the current rates. If you are serious about saving, apply for a loan or refinance today so that you can see the real interest rate.

Also, before you get too excited, the lower rates now do not mean that you should start rolling up your other loans and credit cards into a refinanced mortgage. It is still best to pay off your smaller debts. If you lump all your debt into your mortgage, you risk getting into a longer payment period because you have a huge loan to pay off. Plus, your mortgage will become difficult for you to pay off as well. You could get even further away from achieving your financial goals.

If you do decide on refinancing your loan, here are the benefits you could gain:

You Will Learn About Many Other Refinancers

Consumers tend to stick to one lender. It is usually a combination of laziness and loyalty. The dedication to staying with a particular lender and avoiding doing research is never beneficial. You are missing out on a good deal. Imagine the possibility of cutting the mortgage rate by up to 75%. It does take some digging, which can appear a waste of time. However, you will learn that you do not have just one option. Several lenders are waiting for you to grab their generous offer.

You Can Save a Ton of Money

Obviously, a significant benefit of refinancing is that you can save a lot. A three per cent rate already has a huge difference from a four per cent mortgage.

You can figure out how much you can save with these steps:

  • Examine your loan paperwork and see how much interest you are paying at present. Then, Google the refinance mortgage rate to find the difference.
  • You can use a closing costs calculator, which will allow you to get the estimated fees you will need to pay for refinancing.
  • Lastly, calculate your savings.

The computation does not end here, though. If you like the numbers you see, you will still have to estimate the break-even period or the time you need to exceed the loan fees through your monthly savings.

Let us say that you pay $3,600 for your fees. If you save $100 monthly, it will take 36 months for you to get to that break-even period. If you can see your self holding onto that house for the next 36 months, then it is a good idea for you to refinance.

The benefits make refinancing attractive for Australian homeowners. However, there are also cases when it is not a smart move.

Read below for the drawbacks:

  • Refinancing can save you money, but it can also be more expensive than getting a new loan. The total cost will vary from one lender to another, as well as your location. You should know that refinancing is not free. You will have to pay the outstanding principal, which can be at least three per cent. These fees are for inspection, appraisal, origination, and application. Closing costs will add to the total amount you need to pay, especially if you are borrowing a huge amount.
  • You can end up with more interest if the loan payments are extended. Although it is possible to lower the money repayments, the higher cost of borrowing can offset this particular benefit.
  • You may not enjoy certain features. Some loans come with useful features, but they could be eliminated with refinancing. For example, a lender may offer deferment or forbearance in case you cannot pay your loan due to an emergency. This feature may not be available if you refinance.
  • You could be charged with prepayment penalties. Your old lender may require you to pay for paying off your loan too early. Make sure that you are aware of the cost and compare it to the savings you could gain by switching to another lender.

A street view on some Stirling houses in Western Australia.

 

What About Taking Out a New Loan?

Let’s talk about why you may want to get a new loan as opposed to refinancing your existing mortgage. If you choose this route, you probably will stay with your current lender. In doing so, you save a lot of your time because you are already on the books. Your lender knows who you are, your income, and other pertinent details. You no longer have to provide information and documents, such as proof of income and your living expenses.

Another thing is that you save on fees. As mentioned above, if your lender has prepayment penalties, you will have to pay them in order for you to get out of the loan.

By using the same lender, you can take advantage of their exclusive offers, including a reduced rate to help them retain you as a customer.

To learn whether to refinance or get a new loan, you will need to consider all options you have.

Here are three steps for you to follow to determine which of the two is the better choice:

1. Compare your current home loan with the others on the market.

Don’t be impulsive with your decision. Take the time to investigate what the competitors are offering before you jump to another lender. Just because a specific mortgage loan has a lower rate does not mean you should apply and get it. There are other things to consider, including the loan term, features, and the full costs involved.

2. Understand what your home loan deal is.

Before you refinance your mortgage, you should know exactly what type of deal you have received on your existing loan. The easiest way to do it is to ask the lender for a facts sheet.

This document typically contains the explanations about the loan’s features, including:

  • The loan principal
  • Interest rate
  • The real interest rate after fees and charges
  • The amount you must pay for the loan each year
  • How a change in interest rate could affect your repayments and the loan itself

Using the information from your current home loan, you can make a quick comparison with the rest of your options. Once again, look at the cost and features, such as a redraw facility or an offset account.

3. Be aware of the possible fees.

Switching lenders typically means more fees, such as loan establishment and termination fees. Some lenders may also require you to pay stamp duty. If you need to borrow more than 80% of your property’s total value, you could also pay for the LMI. Think about these costs before choosing another lender, especially if you do not want to pay for them.

Are You Still Confused?

The easiest way for you to figure out whether you should get a new mortgage or refinance is to speak with an experienced Mortgage Broker. As with any other money-related decision, you will need guidance. It will take a lot of time for you to research all your available options. Also, it does not guarantee that you will find every other choice there is.

A broker knows the ins and outs of the lending industry. Before you try to reach any conclusion, it is useful to talk to an expert. Quantum Finance Australia has been in the finance industry for 16+ years so you can talk to us and be guided to find the right lender. We have built a strong relationship with more than 40 lenders so we can help steer you towards the most suitable option.

Plan Australia Hall of fame member Gavin Harrigan.Plan Australia Excellence in Finance

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    ** Comparison rates are based on a loan of $150,000 over a term of 25 years. WARNING this comparison rate applies only to the example given. Different amounts and terms will result in different comparison rates. Costs such as economic cost and cost savings such as fee waivers are not included in the comparison rate but may influence the cost of the loan.

    * Please note not all loan types are suitable for all applicants and the above rate is for general advertising purposes only. Please check the applicable rates are still valid with a Quantum Finance broker. Your full financial situation will need to be reviewed prior to acceptance of any offer or product