Refinancing your debts from your existing lender to another financial institution may allow you to take advantage of other opportunities that your current lender does not provide.
Reasons for refinancing may include:
- Lower interest rate
- Less fees and charges
- Your existing lender no longer provides the loan you require
- Your current lender will not provide you with further finance
- Your circumstances have changed and the products available with your current lender no longer suits your needs
- You aren’t happy with the services you are receiving from your current lender
Refinancing may provide you with the following benefits:
- Cheaper interest rate and fees (help you pay off your debts sooner)
- Additional finance
- More flexibility
However, refinancing from one lending institution to another can be a very costly exercise and you may end up worse off than you think if you don’t plan and research carefully. Before refinancing consider the following:
1. Know Your Terms and Conditions of your Loan
Ensure you know exactly what the terms and conditions of your current loans are that you wish to refinance:
- What fees are you currently paying?
- What interest rate are you currently paying?
- What other benefits do you have on the loan?
2. Understand Your Break Charges
Speak to your lender about any break costs of refinancing your loan. Often banks prefer you stay with them for a period of time and put in place exit costs to reduce the risk of people refinancing to another lender in the short term.
Some lenders may charge you the legal fees for discharging the mortgage or attending a settlement. Ensure you understand what these costs are.
3. Know Your Penalties of Breaking a Fixed Loan
If you are breaking a fixed loan, speak to your lender about any penalties you may have for breaking the loan. Generally in an environment of rising interest rates, banks are happy for borrowers to break their fixed loans as it means they can give this lending to someone else and receive a higher interest rate. However when interest rates are dropping, banks will generally charge an ‘economic cost’ if a borrower refinances.
4. Understand the Cost to Set Up Your New Loan
Look at how much it is going to cost you in total to set up your new loan with the other financial institution. You may have to incur:
- applications fees
- stamp duty
- valuation fees
- legal fees
- service fees
- government registration fees
5. Source the Best Deal
See what the new lender can do for you. Sometimes the new lender will be able to help you cover the break costs of refinancing or be willing to reduce some of their fees and charges so that they can get the new deal over the line. Contact the new financial institution and see what your options are.
6. Questions to Ask Yourself
Once you are aware of the fees to leave your existing lender and the exact fees and charges to set up your new loan, you can then determine if it is best to refinance your loan. Ask yourself the following questions:
- Am I confident that I have included all the costs associated with refinancing my current loan?
- How much am I going to save on the new loan if I refinance?
- What benefits am I going to get if I refinance?
- How long would it take to recoup the refinancing charges in benefits that I will save?
- Do I have the time to organise the paperwork and documentation required for establishing a new loan?
- Do I feel confident in my ability to research and understand the different banking terminology required to compare loans efficiently?
It is best to be able to answer these questions confidently so that you can make an informed decision on whether or not refinancing is the right choice for you.
7. Research Thoroughly
Shop around. Doing your research and understanding your loan options allows you to make an informed decision. If you don’t feel confident in your abilities to undertake this task or if you are strapped for time a mortgage broker may be able to help you out. .
8. No Guarantees
Be aware that if you wish to refinance there are no guarantees that the new lender will approve your loan.
9. Consider Other Banking Changes
If you refinance to another bank, your current bank accounts, credit cards and other facilities may also have to change to the new lender. This may mean that you will need to change any direct debits coming out of your account and notify your employer of your new account information for your pay, etc. This can be quite time consuming.