December is a great time to reset and create goals for the year ahead, and for many Australians, refinancing their mortgage may be at the top of their list of resolutions for the New Year.
Whether you’ve spent the past year listening to experts suggest interest rates may rise, or the financial stresses of the pandemic have you looking for ways to reduce your home expenses, 2022 may be your year to refinance your mortgage.
Let’s explore how you can avoid the common traps and pitfalls of switching home loans and find the best new mortgage option.
Home loan transfer costs
Keep in mind that mortgage refinancing can cost you more than just money. It is important to be aware of all the costs associated with refinancing before you take the initiative.
- Transfer fee This can include initial fees with the new lender, such as application fees and incorporation fees. If you are refinancing from a fixed rate home loan, you may need to pay an early exit fee/fee.
- Extending the term of the loan Another trap that some homeowners can fall into is refinancing and extending the term of their home loan. For example, if you’ve spent five years on a 30-year mortgage and refinanced a new 30-year mortgage, you’ve extended the term of your original loan by another five years. This could cost you thousands of dollars in additional interest charges.
- time and effort – RateCity data found it 40% of refinancing companies Make sure that the time and effort associated with refinancing is one of the biggest obstacles to this process. It is worth being realistic that switching your mortgage lender will require some time in terms of researching and waiting for evaluations, as well as the effort involved in organizing your paperwork, or even Boost your credit score before application.
While it is crucial that you understand some of the traps associated with refinancing, it is worth noting that the potential savings of time and money generally outweigh these costs.
Steps to Refinance Your Home Loan in 2022
1.Set your goals
The most common reasons homeowners look to refinance generally include:
- To get a lower interest rate
- to pay lower fees
- To free up equity in property
- debt consolidation
- To add features to the home loan (offset account, re-draw facility and more)
To refinance, take time to consider which new home loan and new lender might best suit your financial situation and align with your refinancing goals. Use comparison tools, such as comparison tables and home loan calculators, to shortlist your new loan options. Filter your options according to your own needs and compare housing loans side by side by interest rates, fees and potential payments.
Just like when you applied for your existing home loan, you will need to meet specific eligibility criteria, such as loan-to-value ratio requirements, with a new lender to get your new mortgage approved.
Take some time to consider the requirements set by the new lender and assess your current financial situation, including your credit score, any current debt, and your income levels. If there are areas you need to work on, such as paying off your car loan, consider doing so first to boost your chances of being approved for the loan.
Now that you know your ideal new lender and are all set to meet the lending criteria for a new mortgage, it’s time to get your paperwork ready. Gather the ID and income verification documents you may need ahead of time to make the application process as easy as possible.
Hop online or consider going to a branch to submit your refinancing application to a new home loan lender. At this point, you may need to pay an application fee. If you follow the first four steps, it will take no time at all.
In some cases, the new home loan lender may reassess your property before they can approve your refinancing application. This will usually take about 2-3 business days after placing the order.
7.Agree to refinance
It may take up to two weeks for a new home loan lender to approve your refinancing application. Once your application is approved, the new lender will begin the transfer process with the current lender.
Congratulations, your loan has been approved. Now the old home loan lender will transfer the title deed and mortgage debt to the new lender, which can take several weeks to complete.
Is 2022 a good time to refinance?
While the Reserve Bank of Australia (RBA) has kept the cash rate unchanged at a record low of 0.10% since November last year, that hasn’t stopped interest rates from collapsing for a year.
In just the past two months, ANZ, NAB and CommBank have raised their fixed rates three times, while Westpac has done so four times, marking the end of the era of less than 2% fixed rates. This may be due to some financial experts suggesting that the RBA cash rate may rise as early as 2022.
Meanwhile, the number of variable interest rates increased below 2%, with 86% of the RateCity database cutting at least one variable rate in 2021.
Arguably the most common reason to refinance a mortgage is to switch to a lower rate and/or lower fee lender. And for many mortgage holders, securing the lowest possible rate is the goal. But as you can see, it seems impossible to predict if and when lenders might move interest rates out of the cycle with the RBA.
RateCity Research Director, Sally Tindall, recently said: Fixed rates may be on the rise, but banks have lowered their lowest variable rates this year in an effort to win over new customers.
“Most banks failed to pass the last two RBA cuts in 2020, so the variable rates had room to move. Competition in the market has brought these rates down to where they should be,” Mrs. Tindall said.
“However, these highly variable price cuts are mainly for new customers…by this time next year, there can be no fixed prices below 2 percent,” She said.
In the end, the decision to refinance is very personal and depends on your financial situation and your budget. But it is worth keeping in mind how the cash rate may move in the future, especially if you want to fix a lower interest rate.