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Refinance Home Loan
Refinancing a home loan has never been easier. All banks are on the lookout for new customers, however customers of existing financial organisations are finding it easier and easier to negotiate a better deal. There are many reasons for people wanting to refinance a home loan, these include price/deal, renovation and/or debt consolidation. We’ll look at a number of reasons why people refinance a home loan below.
The process of refinancing a home loan is relatively simple. It differs depending upon your situation and whether you are refinancing through the same organisation or switching to another.
The process of a home loan refinance with the same organisation usually involves a brief review of your finances through to a total analysis of your financial situation, it all depends on what you are looking to achieve. If for example you are just moving from one financial product to another without any change in the amount of lending, the process will be extremely simple and in all likihood be over in a matter of hours. You may not even need to sign everything. It can all be done over the phone. Many banks operate this model these days. You’ll receive confirmation of your change in the mail.
There are many reasons for wanting to refinance your home loan. Below are listed some of the popular reasons and tips for how to get the best deal from the opportunity.
Get a better rate
Most people refinance their home loan to get a better rate or overall deal. Often there is more than just interest rate that is available as part of the deal. There is substantial competition in the market from lenders and rates/fees can vary substantially between lenders. Some financial organisations rely on existing customers not to switch. These customers (the banks call them entrenched or back book customers) are the bank’s bread and butter. Often margins for these customers are higher and banks rely on customer inertia not to move. They rely on the move just being too hard for many people. Remember, at most it will only take a few hours of your time to get everything together for the bank to assess as part of a refinance application. The financial benefits that might flow from the decision could be substantial.
Refinancing your home loan every couple of years is a good thing. Not only can you get a better rate, quite often your existing lender will match the better rate meaning you’ll not need to go through the hassle of signing forms and credit checks with your new organisation. Even if you don’t refinance and stay with your existing lender the odds are you’ll get a better deal all things being equal.
Don’t be afraid to bargain with your new or potential new lender. There is almost always a better rate to be had, especially if you are bringing a large loan to the table. Typically banks will be more negotiable on larger rather than smaller loans.
Getting a better rate with your current lender might mean a few discussions, and it may also mean actually going through and getting formal approval from a new lender. Banks have teams of people called “retention specialists” dedicated to keeping your business. It costs the banks a lot more money to acquire a new customer than it does to keep an existing one. Use this fact alone to negotiate with. Retention specialists have significant delegation to authorise special interest rates or deals. Typically you won’t get the run-around with these specialists, they are heavily incentivised to get you the best deal.
Renovation or Rebuild
Another common reason for a home loan refinance is renovation. This option is a little less straight forward than getting a better rate, although the possibility of getting a better rate is also a possibility. There are two possible courses, your existing property value will cover the increased need for finance or the value of the renovation will take you outside of the current lending limits. In both instances you’ll need to prove that you are able to service the loan. This will involve a full disclosure of your assets and liability plus income and existing debts.
If your current house permits, i.e. you have sufficient equity or the value of your property has increased sufficiently combined with a formal valuation (provided you can service that loan) that will be the end of the process and the bank will in all likelihood lend you the extra cash.
If however your new renovation takes you over the current valuation limits there will be a slightly varied process. A construction loan will be taken out as part of your loan package. Provided there is serviceability (the ability to pay the loan back) the loan is drawn in stages as the build/renovation progresses. This loan is used to pay the builders and other professionals who are working on your property. At the end of the build process this construction will be folded into a new loan which will encompass the value of your built/renovated property.
Loan consolidation is another common reason to refinance a home loan. Many people have a number of debts over and above home loans. Common debts that are folded into a home loan refinance include credit and personal loan debt. The main benefit of refinancing your home loan in this manner is you benefit from lower interest rates that apply to home lending as opposed credit card and personal loan debt.
While the interest rate is lower on a home loan, you need to be careful that the amortisation of the home loan (the period in which you pay it off) does remove the benefit of the lower interest rate. In other words, your personal loan may go from being a 3 year personal loan to a 25 year home loan. If you can afford to keep paying off the home loan at the same rate at the personal loan you’ll pay off the part of the home loan which was originally a personal loan/credit card debt.
Refinancing a home loan has many benefits to a borrower. There are some drawbacks and you’ll need to consider these. It’s important to consider the effect of fees and other charges with refinancing your home loan. Fees can include application, monthly, legal and valuation fees. Make sure there is enough benefit from the new deal to warrant the switch to another lender. Often lenders will advertise a really low rate only to claw back this low interest rate with high monthly or annual fees. In addition, really low interest rate deals can also come with high break fees should you decide to switch your loan again further down the track. Make sure you understand all the fees and charges that may apply and add them into your consideration when picking a lender.
There are many benefits to switching loans. The market is highly competitive and the chances are there is a better deal out there to benefit you. Refinancing is also useful when you need extra cash for things like a renovation or loan consolidation