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:
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.
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.
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.
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.
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.
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.
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.
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.