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.

 

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Tune in to the latest episode of Property Showcase, the podcast with the inside track on the products and businesses that will help turbocharge your portfolio, maximise returns and make your overall investment experience seamless and stress-free!

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

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

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Son Pham is the accredited Head of Mortgages at Rethink Financing\/Rethink Investing. He has over 6 years\u2019 experience writing loans, over 12 years in the wealth management industry working for the likes of CBA, AMP and private practice and he is also a licenced financial planner (AFSL 326450). He has multiple investment properties that are cash flow positive which help pay his mortgage on his home and fund his lifestyle.<\/p>\r\n

Son is able to write all types of residential and commercial property loans.<\/p>\r\n

In this episode of Property Showcase, head of mortgages at Rethink investing Son Pham joins host Tim Neary to unpack how an investor should approach getting a mortgage in place with banks tightening down on serviceability.<\/p>\r\n

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    In this episode of Property Showcase, director of investment services for Open Corp Michael Beresford,\u00a0joins\u00a0editor of Real Estate, Tim Neary to share why he disagrees that the cooling market means that the best times are behind us.<\/p>\r\n

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Will Magee has had ambitions to enter into the Australian property market for quite some time, but it has been more than just finances holding him back.  Having been granted permanent residency just two weeks ago, Will is wasting no time and is now in the process of signing papers and finding his first investment property.

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In this episode of the Smart Property Investment Show, Will joins host Phil Tarrant to share why he is purchasing his first property in partnership with his brother, discuss the complications that can arise from such a strategy, and unpack the ongoing plan for building a joint property portfolio with his brother.

Will will also share how they approached saving for their first property, why he is taking out the mortgage in his name exclusively, and share their savings plan for the year ahead.

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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A property investment plan years in the making
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  ["title"]=>
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Median house prices in regional Victoria outperformed that of Melbourne in the June quarter, the latest REIV figures reveal. 

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Median house prices in the regions rose 4.0 per cent to $419,500 but in Melbourne they dipped by 0.6 of a percentage point to $840,000.

The result in Melbourne was due to a 0.8 of a percentage point fall in prices achieved at auction; this was despite a lift of 2.3 per cent in private sales.

Inner Melbourne suffered due to auction prices, where median prices fell by 4.9 per cent to $1,459,000 but it was middle Melbourne that was hardest hit, with a 5.4 per cent drop to $974,500.

Outer Melbourne had a good quarter with the median rising by 0.5 of a percentage point to $681,000.

Apartment prices in regional Victoria grew by 3.7 per cent to $304,500 while the metro media was up by 0.5 of a percentage point to $604,000.

REIV President Richard Simpson said that despite fewer sales, many sectors of the market were performing well.

“2017 was a bumper year and while the trendline has flattened, despite the fall in median house prices in the June quarter, median prices are still up this calendar year for both houses and units, in Melbourne and in the regions,” Mr Simpson said. 

In particular there was been strong growth in regional centres which is probably due to the first-home buyers’ concessions said Mr Simpsons.

“The first-home buyers’ concession has been a boon for regional areas. A new entrant to the property market buying a house at the regional median will pay no stamp duty, while a first home buyer of an apartment in Melbourne at the median price would pay stamp duty of nearly $25,000,” he said.

Mr Simpson said that more prospective buyers are looking towards regional Victoria which is also having an effect in Melbourne.

“Melbourne’s outer perimeter continues to grow. Small increases in the June quarter mean that the median prices for both houses and units have risen over 10.5 per cent from a year ago.

Mr Simpson said moving forward that vendors need more realistic expectations as the highs of 2017 are now over.

“Negative chatter about the future of the sector coupled with stronger lending controls by financial institutions has created some uncertainty and vendors need to be realistic with their price expectations,” Mr Simpson said.

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Regional Victoria showing up Melbourne in price performance, new data finds

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