Refinancing traps and how to avoid them
When you refinance your home loan you replace it with a new loan that offers a better deal than your current loan terms. It’s helpful to remember that the business of lenders is to make money, and that home loans are structured for the benefit of lenders. A lender wants to keep your business because you will be paying interest until such time as you have paid off the loan, so a home loan contract will have provisions that make sure the lender doesn’t lose out if you break the contract by paying off the loan early. The refinancing process is complex, and not be taken lightly. You’ll need to do some work and shop around, comparing a lot of competing products to make sure a refinance deal offers the best for you.
Some traps of the refinance process
On the face of it, switching to a new home loan at a lower rate of interest than you are currently paying has the potential to save you money. However, there are some costs of switching home loans that you might not spot while you’re concentrating on that obvious feature, interest rates. When taking out a new home loan you will find that:
- The new lender charges establishment fees. These are charges to cover the lender’s administration costs in setting up the new loan, and include handling fees, loan approval fees and settlement fees. You may also be charged by some lenders for the cost of a valuer’s assessment of your property.
- Your current lender charges exit fees. These may include deferred establishment fees to cover the lender’s paperwork costs, and early termination fees charged by the lender to compensate for interest lost when you exit the loan before the agreed date. Early termination fees can be very expensive, especially if you are exiting from a loan with a discounted interest rate, because in effect you’re reimbursing the lender for both past and future losses.
- There may be government taxes to pay. When a home loan is taken out the various states and territories of Australia charge stamp duty. The amount of the tax is related to the value of the property and it can add significantly to the upfront costs you pay when taking out the new loan.
Avoiding the refinance traps
If you find a new loan with competitive rates, the costs entailed in switching from your current loan may eat into a lot of the money you hope to save in interest payments. To get around some of the costs of refinancing you could try to:
- Find a loan without setup fees. There are loans available with low or zero establishment fees, and it will be useful to include these loans in your comparisons as they have the potential to save you several hundred dollars.
- Avoid loans with punitive early termination fees. If it’s likely that you will be refinancing again in a few years, take the precaution of looking closely at the exit terms of your new contract so that you can avoid incurring high exit fees next time around.
- Negotiate with your current lender. It’s advantageous to your lender to keep your business because it’s more convenient and less costly for the lender to satisfy an existing customer than to find and sign up a new one. It could be well worthwhile talking to your current lender who may have enough flexibility to offer you significantly improved contract terms so as to keep your business rather than having you switch to another lender.
Now that you are aware of some of the traps of the refinance process and know how to avoid them, it’s time to compare the deals available from loan providers. Contact Home Loan Finder for help with comparisons and answers to any questions you may have, and we can also help ensure you get the best refinance deal without falling into any of these common traps.
Related posts:
- Know the Costs of Refinancing
- Exit Fees And Refinancing
- Refinancing Risk
- Weighing Up The Costs Of Refinancing
- 5 Steps to Smart Refinancing
- Can you Save Money by Refinancing
- Property Purchase Traps to Avoid
- How to Refinance an Existing Mortgage with HSBC
- Costs of Refinancing
- Is Refinancing Worth it
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