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Refinancing can help with life’s many changes.
When you first take out a home loan, it’s often on a 25 or 30-year term. Just think how much your life can change in that time! Refinancing gives you the flexibility to tailor your finances to your changing circumstances. Here are some questions to think about before you start.

Why refinance a home loan?

People refinance for all sorts of reasons, to lock in a better interest rate, access more features or to use equity to renovate or buy an investment property.

Some key terms explained

What is refinancing?
When you refinance, you take out a new home loan with a new term and interest rate and pay out and close your old home loan. You may be able to refinance up to 95% of your home’s value by paying Lenders Mortgage Insurance (LMI), or refinance up to 80% without paying LMI. Depending on the equity you have, you may even be able to take out more money on your new loan and use it for other expenses or investments.
Beware of introductory or honeymoon rates
This refers to a loan that appears to give a very low interest rate but upon reading the fine print, the rate may increase significantly after a specific time period (e.g. 12 months).
Refinance cashback
Lots of lenders now offer cashbacks to customers who refinance their home loans. If you are thinking of refinancing for a cashback,   it’s important to look at the ongoing fees and interest rate you’ll be offered by looking at the comparison rate. Sometimes the carrot looks better than it tastes!
What is a comparison rate?
Every lender has an interest rate as well as other costs such as establishment or monthly fees. A low interest rate may be countered by these. To allow you to compare ‘apples’ with ‘apples’, comparison rates give you a better idea of the true cost of the loan, factoring in additional fees to standardise the offer.

What should you consider when refinancing your home?

The most important thing is to take your time and consider your options. At the end of the day, you are taking out a home loan. While it may not be surrounded by the excitement of purchasing a new home, it’s still the same ongoing commitment. Here are three important things you should do:

1. Work out exactly what you want

Amount

Do you want the same amount as your current loan or do you want some extra money? Find out your borrowing power.

Term

Do you want to continue where you left off or do you want to extend to a longer term to keep your repayments lower? Remember the longer the term, the more interest you may pay.

Features

What extra features are important to you? Do you need offset or redraw facilities, for example?

2. Imagine the new loan in play

Your financial situation may have changed since you took out your original home loan. If you’re using the equity in your home for an investment property, these new repayments will affect your everyday cash flow too.

Do some sums to see how refinancing will affect your lifestyle in both the short term and long term.

3. Research associated fees

When refinancing your home loan, there will be fees involved both in closing off your previous loan and in taking out the new one. Make sure that the cost of refinancing doesn’t outweigh the benefits.

Fees may include:

  • Settlement fee
  • Mortgage registration
  • Loan establishment fee
  • Loan service or package fees
  • Discharge fees

Is refinancing from a fixed rate loan a bad idea?

There tends to be higher costs associated with paying out a fixed rate loan early. That’s why we encourage customers to closely weigh up the costs versus benefits of refinancing before deciding whether it’s the best option. Discuss the fixed rate break cost with your bank and look at the financial benefits of moving to the new bank. This could be done by working out the interest rate savings over the term of the new loan.

Which is the best loan for me?

Keep in mind the reason you are refinancing and what you want to get out of it. If you’re refinancing because you would like some extra cash each month, you might be best going for an option with a lower rate and no offset. If you are refinancing to get some certainty in your payments, a fixed rate may be best.

You can also take advantage of both variable and fixed rates by splitting your loan. This gives you both feature flexibility on the variable rate and repayment certainty on the fixed rate portion.

If you had key features in mind, look for loans that offer these. Take your time and get it right. If you find it a bit overwhelming, make an appointment with a Great Southern Bank Mobile Banker or pop into a branch to see one of our Home Loan Specialists.

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