What to consider before refinancing your home loan

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As interest rates drop to historic lows, a growing number of homeowners today are considering refinancing their home loans.

Refinancing is the process of replacing your current loan with a newer one, or with a different lender, based on factors such as lower interest rates. These factors can bring down your monthly repayments and may even offer cashback bonuses, based on the lender. Before making the switch, try and maximise the benefits you get from refinancing your home loan through these methods.

Negotiate
Before making a decision, consider talking to your current lender about your refinancing plans to see if they discount your interest rates to keep you as a client. Negotiations may be in your favour if you have at least 20% equity. Equity is simply the difference between the value of your property and the amount you owe on the home loan. The quicker you are able to boost your equity, the stronger your bargaining power will be, financially.

Ensure that your loans are of a similar length to your current one. Some lenders may offer discounts on interest rates for long-term loans, which could mean that you pay more as interest for a longer period of time.

Compare fees
It can be useful to use online tools to compare home loans, or engage a qualified mortgage broker to help you gauge the home loan options that are available in the market for you. A broker may be able to offer recommendations that are tailored to your income, expenses and other financial habits.

It is important to understand your financial capabilities before you decide to switch. If you were on a fixed rate loan, you may be charged a break fee, which can be very high if the interest rates have dropped since you’ve taken the loan. Termination fees, switching fees and application fees are additional costs that can make refinancing an expensive affair.

Lender’s Mortgage Insurance
You may have paid a higher Lenders Mortgage Insurance (LMI) if you had less than 20% equity in your home. This can drive up switching costs and outweigh any benefits you may get from lower interest rates. Consider asking for a refund of some of this amount from your current lender, if you decide to switch, to offset the loss of hefty LMI costs.

Reduce your risk
Finally, it is important to present a persuasive application to the lender of choice. Lenders want clients that are low-risk, who can afford to meet their loan repayments. Ensure that your credit record is a strong predictor of your commitments to paying off the loan. Think about cancelling or at least lowering your credit card limits. Having a high credit limit can shave chunks off your borrowing capacity, as you pose the risk of exceeding a high credit limit that may threaten your home loan repayments.

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