Seven mistakes to avoid when refinancing your home loan

Record numbers of borrowers are refinancing their home loans as rising interest rates and inflation encourages people to look for ways to cut expenses. Home loan repayments are often a major part of the household budget so it makes sense to  review your arrangements. 

While refinancing may help to improve your financial position, there can be hidden costs that make the benefits of switching home loans less clear-cut than you might expect. Kate Jenkinson, Head of Consumer Communications, Liberty Financial, told Canstar about some of the most common mistakes to avoid when looking to refinance.

1. Focusing solely on interest rates

Home loan interest rates have been changing quickly in recent months, so getting a better rate is top of mind for many people, but there is a lot more to a home loan than the interest rate. For example, flexible features such as an offset account or a redraw facility, which are available with many variablevaribale rate home loans, may help you to pay off your loan more quickly, saving you money in the long run even if the rate is not the lowest in the market.

You may also want to consider factors such as whether the lender aligns with your social and environmental values, and whether you can speak to a real person when you need customer support. By looking exclusively at interest rates, you may miss out on other benefits that are valuable to you.

2. Ignoring fees and costs

If saving is your aim in refinancing, you will need to consider all the costs associated with switching to a different home loan, not just the interest rate. While there are no exit fees on variable rate loans taken out after 1 July 2011, there may be break costs on fixed rate loans and other fees associated with closing your loan account. Make sure you understand all the fees and costs to avoid paying more over time.

3. Thinking short-term on loan terms

One way to reduce your loan repayments in the short term is to refinance and extend your loan term. This might make life easier for now, but remember that you will be carrying the debt longer and pay more interest in total over the life of the loan than if you repay the debt more quickly.

4. Prioritising cash back offers

Cash back offers are common in the market now with lenders vying for business. These incentives can be attractive, but it is often more important to look at loan features of the loan and the costs you could accrue over the entire term to determine whether a particular home loan will suit your needs.

5. Not consolidating debt

Debt consolidation can be beneficial, and this is a good thing to keep in mind when refinancing. Rolling other debt, such as a car loan, into your home loan can help you to save as the interest rates offered on personal loans are typically higher than those charged on home mortgages.

6. Not checking your credit score first

If you decide to refinance, you will be closing your existing home loan and applying for a new home loan. Before granting approval for the new home loan, the new lender will want to check your credit report again.

You can check your own credit score and report for free before you start shopping around for a better home loan. That way you can make sure your finances are in order and there are no surprises waiting for you – especially if your circumstances have changed since you took out your original home loan.

7. Not getting the right advice

There are various tools available to help you when you’re looking to refinance your home loan, such as the mortgage switching calculator on moneysmart.gov.au. Plus, each home loan will have a target market determination document that outlines who the lender believes the home loan will suit.

But even with these tools to help, there is a lot to consider when you’re making such an important financial decision, which is why more and more people are seeking expert advice on refinancing.

An experienced mortgage broker will take the time to understand your needs and help to find the best lending solution for your circumstances or make your current loan work better for you.

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