The Reserve Bank of Australia (RBA) raised its cash rate to 3.10% in December 2022. This marked an increase of 300 basis points since May 2022. The increase in the cash rate also increased the variable home loan rates for borrowers.
That’s why the biggest buzzword in 2022 for mortgage holders was refinancing. But be careful. There could be a catch when refinancing to a lower interest rate.
How Refinancing To A Lower Rate Could Be A Mistake
You End Up Paying LMI Again
If the Loan-To-Value Ratio (LVR) on your current loan is above 80%, you might have to pay Lenders Mortgage Insurance (LMI) again when you refinance. LMI fees can go over thousands of dollars. And if you choose to capitalise the fee, it increases your repayments.
Broker Tip: Reduce your LVR to below 80% to avoid paying LMI when refinancing.
It Adds Years To Your Loan Term
When refinancing, the new lender might offer you a lower rate for a 30-year loan term. If you’ve already been with your current lender for a significant time, refinancing to a new 30-year loan term means you’re paying more interest overall.
Broker Tip: Opt for a shorter loan term and choose a loan that does not penalise you for making extra repayments.
You Chose A Honeymoon Rate
In a competitive market, lenders offer low rates to entice new customers. These are called ‘honeymoon rates’ or ‘introductory rates’. For a short period, you’re repaying at a low-interest rate. But once that period ends, you revert to a higher standard variable rate. The low-interest rate won’t lead to savings in the long run, as you’re paying a higher interest rate.
There Are Hidden Fees And Charges
There are costs associated with refinancing a mortgage. While you get a lower rate, the lender could charge you fees like:
- Application fees
- Valuation fees
- Ongoing fees
- Discharge fees
- Transaction fees
- Settlement fees
Broker Tip: Look at the comparison rate to see how much in hidden fees you would be paying. The comparison rate takes into account the upfront and ongoing costs of having the loan.
Home Loan Features Are Missing
The lowest rate on your home loan could come with caveats, like no offset account and a penalty for early repayments. These loan features help to reduce the interest paid over the life of the loan. If you’re stuck with a basic low-rate mortgage with no additional benefits, you don’t reap the advantages of refinancing.
How To Get The Right Refinance Rate In 2023
- Look at more than just the rate. Look at the total cost of the loan over the time you intend to keep it.
- A lower rate is one of the many reasons why refinancing could work for you; however, a slightly higher interest rate with the features you require could benefit you more in the long run.
- Make sure you have enough equity in your home so the LVR is below 80%.
- Make sure you have made regular repayments to your current debts
- Make sure your credit history is clear before you refinance
Let Us Help You Refinance Today
Do you need to refinance your home loan in the new year? Home Loan Experts mortgage brokers are here to help. Call us on 1300 889 743 or enquire online for free today.