Refinancing your home loan can be a great way to access more suitable features, get the most out of your repayments, and help you pay down your loan sooner. Here are Tic:Toc’s top refinancing tips to consider when weighing up your options.
Know your credit score
Before you choose to start looking at your refinance home loan options, consider the health of your current credit score. While your credit score isn’t the be-all-end-all of whether or not you’ll be approved for a refinance, it is certainly factored into the decision-making process.
You can check your credit score directly by visiting:
Equifax Australia www.mycreditfile.com.au
Illion Australia www.checkyourcredit.com.au
If your credit score is considered risky, explore your options to rectify this before applying for a home refinance.
If your refinancing goal is to get a lower home loan rate, and your credit score is in good health, you could also consider asking your current lender if they’ll lower your home loan interest rate. Having equity of more than 20% combined with a good credit score can give you good leverage in the negotiation process. It never hurts to ask.
If your current lender won’t budge, it could be time switch lenders.
Consider variable or fixed
Continuing with our refinancing tips: know which type of home loan you want before you commit to refinancing. Your choice may depend on your personal circumstances and your assessment of the current economic climate.
A variable rate home loan is great for when you can handle the flexibility of rate rises and falls. Typically, variable home loans allow more or unlimited additional repayments when compared with a fixed rate home loan.
A fixed rate home loan is great for when you want certainty of repayments, and you’re not as concerned with flexibility. You’ll be locked into the loan for a set period of time, so won’t be susceptible to changes in interest rates the way that a variable rate home loan would be. You’ll also be unable to undertake a home refinance before the fixed period is up without paying hefty break fees.
Choose the right loan term
Refinancing is an opportunity to take on a different loan term if you wish. Loan terms are typically a maximum of 30 years, so if your existing loan term is shorter than this, you may be able to ‘reset’ it to 30 years. Taking on a longer loan term while maintaining the size of the loan can result in lower repayments. The tradeoff comes in the form of more interest payable over the life of the loan, and, of course, having a loan for a longer amount of time.
Depending on your circumstances, the bank or lender you’re refinancing to may not allow you to extend your loan term. Your age, for example, may prevent you from extending your loan term.
Consider carefully whether maintaining the same loan term or extending your loan term is the right option for you.
Can you make additional repayments?
Depending on the specific loan, most lenders will allow a set amount of additional repayments to be made on the loan. This means you can reduce your payable interest by paying off the loan quicker. You may even be able to withdraw your additional repayments through a redraw facility.
When weighing up your refinancing options, check whether you can make any additional repayments and whether a cap exists. At Tic:Toc, we allow unlimited additional repayments on our variable rate home loans. For our fixed rate home loans, we allow up to $20,000 of additional repayments per year. However, we also offer an optional offset account for both our variable and fixed rate home loans.
Is an offset account available?
An offset account is a facility where you can park (usually unlimited) funds in order to offset the payable interest on your home loan. If you had $50,000 in your offset account, for example, you would pay interest on your outstanding home loan amount minus $50,000. This can allow you to save up a lump sum, which you can spend at any time, while also reducing your payable interest.
It’s also a great way to reduce your payable interest on a fixed home loan when you can’t make any more additional repayments.
Offset accounts, however, are not free. Most lenders will charge a small ongoing fee or bump up your interest rate slightly. At Tic:Toc, we charge $10 per month to have an offset account. Did we mention they’re available for both variable and fixed home loan rates?
Check the comparison rates
Comparison rates are a handy tool to compare, at a glance, the cost of a particular home loan. They factor in the lender’s fees associated with applying for the loan, the ongoing fees, and any fees associated with leaving the loan. Comparison rates can give a more accurate representation of the cost of taking on the loan, and helps compare similar loans from different lenders.
Know the fees and costs
Checking comparison rates is one thing, but take it a step further and do a deep dive on the home loans you’re considering to understand their full fees and costs. Check for application, valuation, and admin fees, as well as any other fees. All home loans will come with some unavoidable government and third-party costs, so knowing what the bank or lender charges can help make your pick when it comes to refinancing. It can also give you a more holistic understanding of the total cost to refinance.
Will you pay LMI?
When undertaking a home refinance, consider your LVR and whether it is less than 80% (i.e. you have more than 20% in equity). If you refinance with more than 80% LVR, you may be subject to paying Lender’s Mortgage Insurance. This is an additional cost for most home loans when your equity or deposit amount is less than 20% the total property value.
Are there incentives that sound too good to be true?
Some banks and lenders may offer incentives for switching your home loan to them. Cashback offers are a great example of this, where a lump sum – usually between $1000 and $4000 – is paid to you upon settlement of your refinance.
While the upfront cash is sweet, there can be a sour sting if the overall deal isn’t competitive. Check carefully for hidden costs and fees, and whether or not the interest rate is actually a good deal. A higher interest rate can outweigh the cost of the cashback over the life of your loan, so tally this careful when assessing your total cost to refinance.