How to Get the Most out of Refinancing

Refinancing can be a smart move, but it doesn’t always work out for the better. Tighter lender approval processes, including changes to living expense calculations, can reduce your options for shopping around. Keep in mind that what you borrowed when you established your current loan is not an indicator of what you qualify for today.

To know whether you have the borrowing power to pull off a favourable deal, ask yourself these questions:

1. Have my circumstances changed?

How well a lender will view your refinance application will depend on their lending policy and your current circumstance. Since establishing your existing loan, you might have had children, been made redundant, been promoted, taken out new loans or increased your assets. Your employment, earning potential and savings are among the key factors that lenders consider when determining if you have the financial capability to meet your mortgage commitments.

If your circumstances have changed, it’s vital to demonstrate that your ability to pay your mortgage is unaffected. One way to do this is to show you have enough savings to act as a buffer should you run into trouble with your mortgage repayments.

2. What refinancing costs will I have to pay?

Carefully estimate the refinancing fees to be sure the benefits of switching to a new loan outweigh the costs. To exit your current mortgage, you may need to pay a discharge fee and government charges. For your new loan, you may be up for application or mortgage registration fees. Even if you’re staying with the same lender, you may be charged a switching fee to refinance to a different mortgage product.

If your borrowings are over 80% of the property value when you refinance, you will be up for Lenders Mortgage Insurance (LMI), even though you may have already paid it once. With falling property prices there is the risk that your property has dropped in value and LMI is now applicable.

The costs are even higher if you currently have a fixed rate home loan that you intend to break. Have a close look at your fixed term contract to determine the costs, which may vary according to the duration of your loan and the interest rate.

3. Do I plan to stay in my home for several years?

It may take you a while to recoup the costs of refinancing, so you’re unlikely to get the full financial benefits if you sell up soon. Similarly, refinancing when you only have a small amount left on your loan may not bring many advantages as the cost savings will probably be marginal.

4. Can I put new debt on hold?

Good financial planning for credit applications or big purchases will support your refinance.  When assessing your application, lenders will look at how much debt you have and how this affects your ability to afford the repayments.