1. Your Mortgage NO.70 MARCH 200716
W
ith the recent third interest
rate rise of 0.25% pa in 2006,
interest rates increased by a
total of 0.75% last year. Can you beat the
rate rise by refinancing? There are many
factors to take into consideration before
refinancing, not just the interest rate. So
before you refinance, you need to do
your homework.
Where to start
Write down all the reasons why you
believe you should be refinancing. Then
compare your needs to your current loan
and work out the differences.
If you’re planning on selling your
property over the next couple of years,
this timeframe may not be sufficient for the
savings to cover the costs of refinancing.
Is your loan in a position to be
refinanced? You need firstly to establish
the current value of your property and
then calculate the percentage of your
current loan balance to the value of your
property. Be realistic, as ultimately the
value that will be considered is based
Disclaimer: The answers provided in this section are for general information purposes only and should not be construed
or relied upon as providing recommendations in relation to any financial product. This section is not intended as financial or
investment advice and should not be construed or relied on as such. Before making any commitment of a financial nature
you should seek advice from a qualified and registered financial or investment adviser.
Greg Stevens, general manager, servicing & marketing, AIMS Home Loansadvisory
on the lender’s valuation. Valuers take
many factors into account including the
condition of the property and recent sales
of comparable properties in the area.
Do you have the income to service
your proposed loan refinance? What loan
features will you use?
Things to consider
Do you have any other debts to
refinance and/or do you want to borrow
more money?
If you have sufficient equity in your
property, consider consolidating any
debts and/or borrowing more money for
any worthwhile upcoming need in the
next 12 months. Ensure you have either
a redraw facility or 100% offset account
linked to your loan, as they provide tax
savings for any additional funds parked
in your loan, including any advance
borrowings until you need to draw them.
Don’t incorporate a car loan into your
mortgage. You would be extending a
short-term car loan into a mortgage loan
up to 30 years, which will lower your loan
repayments but increase your interest
costs over the longer-term loan. Keep your
car loan separate from your mortgage
and repay it over the same term remaining
under the original car loan to generate real
interest savings.
Find a suitable loan for your needs
Ensure the proposed lender has had
consistently competitive interest rates
as there’s no certainty that their variable
rate will always be competitive. With
honeymoon rates, don’t be taken in
by the lower entry rate. Check that the
reversion rate applying after the discount
rate period is still attractive.
Does refinancing have pitfalls?
A refinance includes exit costs from your
current loan and costs to establish the
new loan. Do the savings outweigh the
costs to change?
Exit costs from current loan: Discharge
fees; deferred establishment fees may
apply to your loan, if it is being refinanced
within the deferred establishment fee
period, which is typically within the first
five years. If your loan is still within a fixed
rate period, then break costs will apply.
These exit costs can be refinanced into
the proposed loan, if you proceed.
Costs to establish a new loan: Lender
application/establishment fee – try to
negotiate a lower or zero fee with your
proposed lender; if you are increasing
the loan amount, up-stamping duty will
apply; lenders mortgage insurance is
often required where the loan is more
than 80% of the value of the property;
loan settlement fees and other costs may
include lender’s legal costs, valuation fee,
ongoing lender fees, etc.
Before you refinance…
Ask your current lender for a better deal!
Ask if you can switch loans. If switching
is not available, ask your lender to beat
the loan deal that you have found.
If your lender offers you a reasonable
saving to stay, it may be better to stay
with your current lender, rather than
incurring the exit costs and new loan
costs to refinance.
When is refinancing
beneficial?