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Maximising Your Savings: How to Refinance Your Home Loan Without Falling Into Traps

How to Refinance Your Home Loan

With the cost of living on the rise, many families are looking for ways to save money and lower their monthly bills. Refinancing your home loan is one such way to achieve this, but there are some traps and pitfalls that you could very easily fall into if you’re not sure what you’re doing.

With the right resources and financial assistance, however, you will be able to save as much money as possible during the refinancing process. Here are some of the more common traps that you may encounter, and the best way to avoid them:  

1. Chasing Cash Back, Intro Offers and ‘Honeymoon’ Rates 

Lenders really love to draw in refinancers by offering incentives (like cash back deals, introductory rates, and all-time-low interest rates, also known as ‘honeymoon’ rates), particularly in a competitive loan market. In other words, you’ll be guaranteed a significant discount for a short period of time – but once that period is over, that guarantee no longer applies. In fact, there may be fees or other costs you weren’t even aware of.

Whilst introductory offers, cash back schemes, and ‘honeymoon’ rates aren’t necessarily a bad thing, you need to pay close attention to the fine print and the rate you’ll switch to once the offer is over. Remember that if the home loan itself isn’t competitive, you’ll end up paying more in the long run. 

2. Adding Time to the Length of the Loan   

When refinancing, it’s not unusual for a new lender to give you the option to take out a new 30-year term. You should be very wary of accepting this offer, particularly if you’ve already been paying off your home loan for a number of years. This is because switching to a new 30-year term will mean that it takes longer to pay off the loan (and become debt-free), not to mention the larger amount of interest you’ll end up paying.

There are, however, situations where adding more years to your loan term is unavoidable or even necessary. If you’re experiencing financial hardship, for example, adding time to your home loan could help to reduce your monthly repayments, allowing you to get back on track.

3. Failing to Consider the Fees   

Many homeowners are unaware that refinancing can actually be quite expensive initially. There are actually a number of fees involved, including discharge and application fees, a valuation fee, land registration fee, and mortgage insurance. Depending on what state your property is located in, you may also be subject to stamp duty.

Whilst most of these fees cannot be avoided, you need to ensure that your savings outweigh the costs to make the whole thing worthwhile. There is no point in making the switch if all the associated fees are going to chew through whatever savings you may have made.

4. Not Comparing Like with Like   

To ensure that you’re getting the full picture of your potential savings, you need to make sure that you’re comparing like with like. If you currently have a fully featured mortgage, for example, don’t compare it with a basic home loan because what you’ll be getting is not the same. Basic mortgages typically cost less, but a loan with more features may actually save you money in the long run if you know how to properly take advantage of it.

This is, however, a good time to ask yourself whether you’ve previously taken advantage of your fully featured mortgage. If you’ve never used the features that came with your loan (including offset accounts, discounted credit cards, and home insurance policies), now is the time to switch to a basic one. 

Top Refinancing Tips to Maximise Your Savings 

Being aware of the traps and pitfalls that you need to avoid when refinancing your home loan is only part of the equation it’s equally as important to know what you should be doing as a part of the process.

Look beyond the big banks – these days, smaller and even online lenders offer some of the best interest rates and lowest fees. They’re also known for faster online applications and approvals. Understand your loan-to-value ratio (LVR) – with many lenders offering tiered rates, if you’ve built up some equity in your property, you could be eligible for a discount rate. And, finally, remember that rates aren’t everything – consider what other mortgage features could help you to pay off your home loan faster.

Whether you’re working with mortgage brokers, your existing bank, or are trying to navigate the realm of refinancing on your own, being aware of traps to avoid can see you come out the other side with some extra cash in your bank account.

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