Finance advice
Sally Tindall

7 mistakes investors make with refinancing

By Sally Tindall

A lot of Australians have a tendency to set and forget their mortgage – one less thing to worry about, right? But complacency could see you shell out tens of thousands of dollars in extra interest without even lifting a finger.

The mortgage market changes all the time. Regulators introduce new rules, the Reserve Bank moves the cash rate, funding costs change, and disruptive lenders enter the market. Just because your loan was the best on the market when you bought your investment property, doesn’t mean it will stay that way forever.

When done properly, refinancing can be very lucrative, because:

  • If you switch to a cheaper interest rate, you’ll be able to pay off your loan faster or buy your next property sooner
  • If you revalue your property and find it has gone up in value, you’ll be able to pull out more equity for your next purchase

That’s why it makes sense to investigate refinancing every five years or so. That said, refinancing can cost you even more money if you get it wrong.

So let me share with you the seven most common mistakes people make when they switch home loans – and how to avoid them.

1. Switching to a longer loan term

If you’ve knocked, say, four years off what was originally a 30-year mortgage and then move to a new 30-year loan, you could actually lose money even with a cheaper rate.

Imagine your current mortgage rate is 4.50 per cent, and that you’ve got $300,000 left to pay over 26 years. You’d be looking at an overall bill of $509,469. But if you switched to a 4 per cent loan, stretched out over 30 years, your overall bill would be $515,609.

Solution: Make sure your new loan term is the same as your existing loan. Serious savers can also keep their monthly repayments the same and knock extra years off their mortgage.

2. Refinancing in a falling market

Imagine you originally borrowed $400,000 to buy a $500,000 property with an LVR of 80 per cent. After three years, with your debt reduced to $375,000, you decide to refinance – only to discover your property is now worth $460,000 with an LVR of 81.5 per cent.

Now that you’re above the 80 per cent benchmark, your new lender would probably force you to pay several thousand dollars in lender’s mortgage insurance (LMI).

Solution: Avoid refinancing if your equity is less than 20 per cent. If you have to pay LMI, then refinancing is unlikely to be worth it.

3. Falling for honeymoon specials

Some lenders lure new customers by advertising mortgages with artificially low short-term rates. They then get a nasty surprise when, one or two years later, these mortgages revert to the ‘real’ rate – which can be more than 1 percentage point higher.

Solution: Base your refinancing calculations on comparison rates, not advertised rates.

4. Ignoring add-on fees and charges

There are plenty of mortgages where the advertised rate and the real rate are one and the same. But you can still get caught out if you don’t include the cost of switching in your calculations.

By the time you add up discharge fees, application fees, valuation fees and various other charges, you could be looking at a refinancing bill of more than $1,000.

Solution: If you’re refinancing to a loan that has upfront fees, ask for them to be waived. Chances are the lender will want your business and consider waiving them for you.

5. Changing loans but not lenders

Some people refinance with the same lender – that is, they move from one of its products to another. But unless you’ve considered each of the 100-plus investment lenders in the market and each of the 1,000-plus investment loans in the market, this could be a mistake. After all, with so many options out there, what are the odds that your current lender really does offer the best value?

Solution: Take the time to weigh up your options.

6. Offering blind loyalty to the big four

Three out of every four property investors take out their mortgage with one of the big four banks. If you do a comparison search on a home loan comparison website, you’ll see how crazy this is because there are dozens of lenders that offer cheaper rates than the major banks.

Of course, price isn’t everything, but you’ll find many lenders who can match the big four on quality while beating them on price.

Solution: Give challenger lenders a chance to win your business.

7. Trying to do it all on your own

The common thread running through all these refinancing mistakes is a failure to do due diligence. Some people find it too hard; others too time-consuming. In today’s world, that’s no longer an excuse because there are plenty of high-quality – and free – outside experts and resources you can use.

Remember, you can lose thousands of dollars if you move to a mortgage that offers less value than another one on the market.

Solution: Visit a comparison website, use a mortgage calculator and consult a mortgage broker before you sign on to your next mortgage.

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About the Blogger

Sally Tindall

Sally Tindall

Sally manages the RateCity editorial team, producing consumer-focused insights into personal finance and cost of living issues.

 

FROM THE WEB

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In this episode of the Smart Property Investment Show, Dominique Grubisa joins host Phil Tarrant to share her personal story which saw her hit rock bottom with excessive debt during the GFC.

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Dominique unpacks how, by relying on her background in law, she was able to overcome that debt and in doing so develop a unique investment strategy which she believes many can utilise today.

Dominique discusses distressed properties, and how she goes about finding them in order to buy property well below market value. She shares the process of identifying distressed properties as well as the controversy surrounding this buying method.

If you like this episode, show your support by rating us or leaving a review on iTunes (The Smart Property Investment Show) and by following Smart Property Investment on social media: FacebookTwitter and LinkedIn.

If you have any questions about what you heard today, any topics of interest you have in mind, or if you’d like to lend your voice to the show, email [email protected] for more insights!

RELATED AREAS OF INTEREST:

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More than just bricks and mortar, experts often regard property investment as a ‘game of finance’. As such, a good finance strategy can lead any investor to success.

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To hear more about these services, make sure to tune into this episode of Property Showcase!

 Make sure you never miss an episode by subscribing to us now on iTunes!

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    In this episode of Property Showcase, Michael Beresford joins editor of Wealth James Mitchell to unpack why recent political changes are not reason for concern for Australian investors.<\/p>\r\n

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Many investors who would have been successfully approved for finance last year are struggling now to either begin or continue their property investment journey because of the current financial climate.

In this episode of the Smart Property Investment Show, broker John Manciamelli and Momentum Media director Alex Whitlock joins host Tim Neary to discuss how APRA changes and the royal commission have resulted in a tighter lending economy and what that means for Australian investors.

They discuss what traps investors should avoid if they are trying to obtain finance, the four key growth drivers in a property market and unpacking trust structures while revealing one type of trust that you should miss.

If you like this episode, show your support by rating us or leaving a review on iTunes (The Smart Property Investment Show) and by following Smart Property Investment on social media: FacebookTwitter and LinkedIn.

If you have any questions about what you heard today, any topics of interest you have in mind, or if you’d like to lend your voice to the show, email [email protected] for more insights!

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AREAS MENTIONED:

Hobart
Bondi
Deception Bay

 

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More than just bricks and mortar, experts often regard property investment as a ‘game of finance’. As such, a good finance strategy can lead any investor to success.

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Getting finance approved in this tightening lending environment

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