December is a great time to reset and create goals for your next year, and for many Australians, mortgage refinancing can be high on their New Year’s resolution list.
Whether you’ve spent the last year listening to experts suggest that interest rates might rise, or the financial pressures of the pandemic forcing you to look for ways to cut back on your household expenses, 2022 could be your year for refinance your mortgage.
Let’s explore how you can avoid the common pitfalls and pitfalls of home loan switching and find your best new mortgage option.
Home loan change fees
Keep in mind that refinancing a mortgage can cost you more than just money. It’s important to know all of the costs associated with refinancing before you take the plunge.
- Change fees – This may include upfront costs with the new lender, such as application fees and set-up fees. If you are refinancing from a fixed rate home loan, you may need to pay an early exit fee / exit fee.
- Extension of loan term – Another trap that some homeowners can fall into is refinancing and extending the term of their mortgage. For example, if you’re five years away from a 30-year mortgage and refinance a new 30-year mortgage, you’ve extended your original loan term by an additional five years. It could cost you thousands of dollars in additional interest charges.
- Time and effort – RateCity data revealed that 40% of refinancers see that the time and effort associated with refinancing is one of the biggest hurdles in the process. It’s worth being realistic: changing your mortgage lender will take some time in terms of researching and waiting for evaluations, as well as some effort in terms of organizing your documents, even increase your credit score before application.
While it is essential that you understand some of the pitfalls associated with refinancing, it should be borne in mind that the potential savings in time and money usually outweigh these costs.
Steps to refinance your home loan in 2022
1.Identify your goals
The most common reasons homeowners seek to refinance typically include:
- To get a lower interest rate
- To pay lower fees
- Free up equity in the property
- To consolidate the debt
- To add functionalities to the mortgage loan (compensatory account, drawing facility, etc.)
For refinancing, take the time to determine which new home loan and which new lender is best for your financial situation and meets your refinancing goals. Use comparison tools, such as comparison charts and home loan calculators, to compile a short list of new loan options. Filter your options based on your specific needs and compare home loans side by side via interest rates, fees, and potential repayments.
Just like when you applied for your current home loan, you will need to meet specific eligibility criteria, such as a loan-to-value ratio requirement, with a new lender to get approval for your new mortgage.
Take the time to review the requirements set by the new lender and assess your current financial situation, including your credit rating, existing debt, and income levels. If there are areas that you need to work on, like paying off a car loan, consider doing it first to increase your chances of loan approval.
Now that you know your ideal new lender and are ready to meet the loan criteria for the new mortgage, it’s time to get your paperwork ready. Gather any personal identification and income verification documents in advance that you may need to make the application process as easy as possible.
Go online or consider going to a branch to apply for a refinancing with a new mortgage lender. At this point, you may need to pay an application fee. If you’ve followed the first four steps, it shouldn’t take any time.
In some cases, your new mortgage lender may re-evaluate your property before they can approve your refinance request. It will usually take around 2-3 business days after submitting the request.
It can take up to 2 weeks or more for a new home loan lender to approve your refinance request. Once your application is approved, the new lender will begin the transfer process with your current lender.
Congratulations, your loan has been approved. Now your old mortgage lender will transfer title to the property and mortgage debt to your new lender, which can take several weeks to finalize.
Is 2022 a good time to refinance?
While the Reserve Bank of Australia (RBA) has kept the spot rate at an all-time high of 0.10% since November of last year, that hasn’t stopped interest rates from having one year roller coaster.
In the past two months alone, ANZ, NAB and CommBank have raised their fixed rates three times, while Westpac has done so four times, seeing the end of the era of fixed rates below 2%. This may be because some financial experts have indicated that the RBA’s cash rate may increase as early as 2022.
Meanwhile, the number of variable interest rates below 2% has increased, with 86% of the RateCity database cutting at least one variable rate in 2021.
Perhaps the most popular reason to refinance a mortgage is to switch to a lower rate and / or lower fee lender. And for many mortgage holders, the goal is to get the lowest rate possible. But as you can see, it’s seemingly impossible to predict if, and when, lenders may move interest rates off-cycle with the RBA.
RateCity Research Director Sally Tindall recently said: “Fixed rates may be on the rise, but banks have cut their lowest variable rates this year in an effort to gain new customers. “
“Most banks failed to pass on the last two RBA cuts in 2020, so variable rates have had some leeway. Competition in the market has driven these rates down to where they should be,” Mrs. Tindall said.
“However, these ultra-low variable rate cuts are primarily aimed at new customers … By the same time next year, there could be no fixed rates below 2%,” she said.
Ultimately, the decision to refinance is very personal and depends on your financial situation and budget. But it is worth keeping in mind the future development of the cash rate, especially if you want to lock in a lower interest rate.