Six things to consider before refinancing: Adrian Barclay

Refinancing is an expensive process to get wrong, yet Australians haven’t quite yet mastered it. According to the CBA MFAA Home Finance Index (Sept. 2011), only 64% of borrowers who refinanced felt they had benefitted from the process.

Why? Ill-considered switching can result in costs that are greater than the interest rate saving that can be readily recouped within two years.

Secondly, some fall for the trap of refinancing to an account with lower levels of customer service or less flexible features.

Here are a few considerations to think about when refinancing, along with tips to succeed with the transition:

1. Exit fees

Variable home loans financed before July 2012 can suffer from hefty exit fees. It is worth crunching the true costs of exiting against the potential gain.

There are also early repayment fees and discharge fees to factor in.

2. Refinance after a fixed loan period

Due to the high break costs still charged on fixed interest loans, it usually isn’t worth refinancing until the fixed interest period on a loan ends.

3. Ongoing fees

Check the comparison rate, because it is a good indicator of the ongoing fees. The headline interest rate alone does not indicate the true ongoing value of a home loan.

4. Credit record

If a borrower’s credit record has worsened since the original home loan was approved, this will drive up the cost of borrowing and potentially negate the benefits of refinancing. MyCreditFile.com.au is a way for borrowers to access their free credit file report.

Searching for ‘specialist home loans’ (industry parlance for bad credit home loans) and comparing interest rates on such products will give an indication if refinancing is worthwhile following credit blemishes.

5. Property valuation

Falling property values don’t affect the equity of home loan until refinancing is attempted. hether your home has changed in value

An increased valuation will work in your favour — reducing the interest premium due to your lower loan to value ratio. A decreased valuation can cost you an increased interest rate premium or even push you into Lenders Mortgage Insurance (LMI) territory.

In addition, properties mid-renovation don’t value well, which makes refinancing mid-renovation challenging.

6. Entry fees

Common refinancing costs include application fee, valuation fee, loan transfer fee, settlement fee and registration fee.

The showstopper is when a borrower's Loan-to-Value Ratio (LVR) is still greater than 80%, as LMI can be payable in full again. This can cost in excess of $10,000.

Tips for refinancing:
1. Request your credit record

2. Get a private valuation of your property

3. Approach your current lender first

4. Do your sums for costs leaving and entering a new loan

5. Don’t refinance until your LVR drops below 80% — otherwise LMI is payable in full, again.

6. Consider what you need in the whole loan package, from loan rate, flexibility, extra credit and customer service.

7. In general, construction loans can help save on interest while renovating, as interest only starts to be accrued on the payment installments that are withdrawn.

Where can you go to refinance?

- Your bank

- A comparison website

- A mortgage broker

Adrian Barclay a personal finance expert from HomeLoanFinder.com.au