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Home Loans: The pros and cons of refinancing

The pros and cons of refinancing your Mortgage
AUSTRALIANS reckon a change is as good as holiday, and some homeowners are pulling out all stops to prove it.

In fact, the Australian Bureau of Statistics (ABS) says over 176,000 individuals switched lenders in the chase for better mortgage rates over the past year.

It's also known as "refinancing", and there are significant reasons to shift to a new lender.

Among the most obvious is the speculation about interest rate hikes, while the proliferation of lenders has really ramped up home loan choice.

Other motives include dissatisfaction with a current lender's service levels, the need for superior mortgage flexibility (redraw, interest only repayments and credit cards) or the chance to pay off a home loan earlier.

Others will refinance as a way of consolidating higher interest debt (credit cards and personal loans) into a lower paying loan like a mortgage.

Additionally, swapping lenders allows some individuals to use the increased equity in their homes to raise funds for renovations or other investments.

But whatever your motivation for refinancing may be, there are significant costs to consider too.

Refinancing can set you back as much as $1000 (and more, in some cases).

Expect to pay a few hundred dollars in valuation fees, as well as an early discharge fee to your old lender - particularly if you're breaking out of a fixed interest mortgage arrangement.

You'll also probably have to pay an application fee (around $400) when signing up for a new loan plus mortgage insurance if you borrow more than 80 per cent of a property's value.

Then depending on which state you live in, you might be faced with an additional stamp duty charge.

And that's just the financial expense - refinancing can be a large drain on your time, too. Think about it. Rather than one lender, you're now dealing with two, and the paper work involved can be significant.

One option is to seek the assistance of a mortgage broker. They can match you with the right lender and manage the resulting information flow and paper work. But of course there are payment considerations, which may affect the advice you receive.

As a rule, lenders pay mortgage brokers an upfront fee of around 0.4 per cent of the value of the loan amount, while trails (ongoing commissions) may represent around 0.2 per cent of the loan balance.

So before you do anything, contact your current lender to see what it can offer.

You may be able to switch for little or no cost - this has to be worth a quick phone call.

As part of your decision-making, I'd recommend sitting down and working out the costs of refinancing and how long it will take to recoup them.

If you're planning on selling in the short term, refinancing may not be for you. However, if you're planning to keep the property for the long haul, the hassles and costs of refinancing might be worth the pain.

Finally, if your number crunching shows you can save some money, then switching lenders is a perfectly good option, but remember to ask if your current lender can match the deal you are considering before you move.


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