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9 common mistakes to avoid when refinancing a home loan

25 July 2023
• 5 minute read
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9 common mistakes to avoid when refinancing a home loan

With more and more Australians rolling off record-low fixed rate home loans this year, it’s no wonder that refinancing is big news. A recent survey by financial comparison site InfoChoice found that 69 per cent of Australian mortgage holders are either planning to refinance or seek a rate review within the next 12 months.

While refinancing a home loan can be a great way to secure a better rate, it’s not without its pitfalls. This article looks at nine of the most common mistakes people make when refinancing a home loan, so you’ll know exactly what to avoid!

#1 - Not shopping around

A persistent myth about refinancing is that it’s less hassle sticking with your current lender than trying to find a new one. Not only is the process the same regardless of who you go with, you may well be doing yourself a disservice by not investigating your options.

Given the amount of money involved, a reduction of even an eighth of a percentage point on your interest rate could see you save thousands of dollars over the life of your loan.

Why not see how much interest you might pay on a Great Southern Bank Home Loan with our handy online calculator?

#2 - Ignoring the comparison rate

While we’re on the subject of rates, it’s important to know the difference between the two interest rates that lenders promote to prospective customers. The first is usually the product’s annual interest rate, while the comparison rate represents the real cost of the loan per year, including any upfront or ongoing fees and charges.

It’s important to pay attention to the comparison rate since it’s a better reflection of the true cost of a home loan.

#3 - Focusing purely on rates

Having said all this, it’s a mistake to focus on rates to the exclusion of everything else. A new lender may offer features that your old one doesn’t such as an offset facility or the ability to make unlimited extra repayments without penalty, both of which could help you pay down your home loan sooner.

Other things to look out for when refinancing include loans with no monthly or annual fees (these can really eat into your repayments) and those offering free redraw, which can be a welcome lifeline if you need access to cash unexpectedly.

#4 - Costs outweighing savings

If you’re moving to a new home loan provider, you may be required to pay your old one a discharge fee. Similarly, there may be early payout costs if you’re refinancing a fixed rate loan. Additionally, there may be application and/or establishment fees with your new lender, and potentially Lenders’ Mortgage Insurance (LMI) if your loan-to-value ratio (LVR) exceeds 80 per cent.

If there are significant costs to refinancing your home loan, it could take some time for your reduced repayments to represent an actual savings benefit. This is especially worth bearing in mind if you’re planning on selling any time soon.

#5 - Cashing out too much home equity at once

Refinancing allows you to borrow against your home’s equity, which can be a convenient source of funds for repairs and renovations, or to make large purchases such as a car or holiday.

However, this can also expose you to risk, particularly in the current climate of rising interest rates. It’s best to play it safe and not cash out too much home equity in one go.

As a general rule, most lenders won’t allow you to borrow an amount that would see your loan-to-value ratio (LVR) exceed 80% anyway. Doing so wouldn’t just be irresponsibly risky, it would also mean you’d have to pay Lenders’ Mortgage Insurance (LMI) on top.

#6 - Taking out another 30-year home loan term

If you’ve had your home loan for some time, it can be tempting to refinance with a new term of 30 years.  Sure, your repayments will probably drop significantly due to the lower rate, but the downside is that you’ll be back to square one in terms of how long it’ll take to pay off, not to mention the thousands of dollars in additional interest.

If possible, carry over the remaining term of your existing home loan onto the new loan.

#7 - Assuming refinancing will be approved

You will need to meet your lender’s credit requirements before being approved for refinancing. If your financial circumstances have changed since you purchased the property, this might not necessarily be possible. And if this does turn out to be the case, a failed application may further impact your credit score.

#8 - Refinancing at the wrong time

Getting the best value out of refinancing is often a question of timing. For example, if you have a fixed-rate loan near the end of its term, you’re probably better off waiting until the term has ended rather than refinancing and incurring break costs.

#9 - Being seduced by ‘honeymoon’ rates

Some lenders offer ‘honeymoon’ rates (often called ‘introductory variable rates’) to entice new customers. These are typically among the lowest you’ll see anywhere. But as with all honeymoon periods, they only apply for a limited time. If you find yourself tempted by a deal of this kind, it’s absolutely crucial to research the rate you’ll revert to when the proverbial honeymoon’s over. If it’s higher than the rate you currently pay, you almost certainly won’t save money in the long run.

Considering refinancing your home?

While it always pays to be across the details of financial decisions, the amount of time and money involved means this is never truer than when it comes to refinancing a home loan.

If you’re ready to get the ball rolling, you can apply for a Great Southern Bank Home Loan online or, if you prefer, speak to one of our Home Loan Specialists by calling 133 282.

Alternatively, you can always pop into your nearest branch for a chat.

Mortgage need enhancing? Get clever refinancing.

Smart ways to pay off your home loan sooner.

Important Information

Great Southern Bank, a business name of Credit Union Australia Ltd ABN 44 087 650 959, AFSL and Australian Credit Licence Number 238317. Conditions, fees and charges apply. This is general information and does not take into account your objectives, financial situation or needs. Consider the appropriateness of the information, including the Terms and Conditions (T&Cs) booklet, before acting on it. The Financial Claims Scheme may apply to this product; refer to the T&Cs for more information.

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