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5 biggest mistakes refinancers make

·5-min read
Aerial view of Melbourne suburb and Australian money being fanned out.
Refinancing your home loan is one of the biggest ways Aussies can save money (Source: Getty)

As locked-down Aussies both look at the house/apartment around them and look to tighten their belts, they are having an interest epiphany…and it’s this:

Refinancing your home loan is the fastest and most effective way to save money.

So it’s no surprise we collectively switched a record $16 billion in June, up more than $1 billion in just one month, according to the latest ABS figures.

The figures put the year-on-year switching increase for investors at 13 per cent and for owner-occupiers, 16 per cent.

More from Nicole Pedersen-McKinnon:

If you haven’t joined the throng throwing out their current lender, it’s time to get ‘chucking’. You can save almost $300 a month instantly by switching from the average big four variable rate of 3.2 per cent to the best-in-market, quality rate, way down at 1.89 percent.

(And by quality, I mean a mortgage that comes with a genuine offset account.)

But it is way too easy to make one of the five refinancing mistakes that will end up costing you money rather than saving you:

Mistake 1: Extending your loan term

Unless your loan is very young, if you refinance to a better deal but take it over a fresh 25 or 30 years, you’re going to end up paying more. Full stop.

Sure, your monthly repayments will fall, but ultimately you will fork out way more interest over that longer period.

If you instead take the loan over your same, remaining loan term and what I call “up stumps but still stump up”, you will save a guaranteed tens of thousands of dollars and shave possibly years off your loan.

And remember this is for no extra money than you are used to paying.

Mistake 2: Falling for the fixed rate

Now, fixed rates are currently attractive (although slightly less so than they were a couple of months ago). But this has often been a deliberate ploy to get you into an institution, and then migrate you onto a far higher variable rate.

Indeed, I advocate only ever fixing half a mortgage anyway, which would effectively put you on the higher variable rate for 50 percent of your loan straight away. The reason for this is that fixed rates often don’t come with decent offset accounts, although check because there are notable exceptions.

(And don’t miss that if you are still on a fixed-rate period, you will face big break costs which will make a refinance a false economy.)

Mistake 3: Being swayed by a cashback

It is an increase in the cost of funding for lenders that has led to the lift in fixed rates…and they have started looking at new ways to lure you.

As such, cashbacks have become the order of the day.

RateCity says 25 lenders are now giving you bonus bucks - between $1000 and $5000 - (mostly only) when you switch.

More enticing still, 21 of those lenders are offering cashbacks on at least one rate under 2 percent for owner-occupiers.

Even so, most of your advantage is lost after just two years. RateCity analysis shows only two cashback deals come out ahead against the lowest variable rate on the market after that time.

After three years, none of them trump the lowest ongoing rate.

The fact is there are cheaper rates in the market than every loan offering a cashback - so your head start becomes a headwind very very quickly.

The only way you can definitely make this a win is to commit to a refinance after probably as few as 24 months.

Mistake 4: Mistaking your eligibility and hurting your future

The government’s proposed relaxation of lending rules is yet to happen, and it’s still very difficult to get a loan across the line. The Netflix test of your spending in the previous three months is one impediment.

But another is coming as a shock to many people. It is particularly bad if you operate through a business.

Government assistance in the form of JobKeeper and the new COVID-19 payments (as well as the small business cash boost) is being ruled out of income. This is because it is not earned income.

The unexpected move is preventing many Australians from getting a loan…and it will for potentially two whole years.

What’s more, every time you apply for a loan - because you think that you will get it - you drive down your credit score.

That makes it even less likely you’ll get the next one.

Before you make any mortgage move, don’t just think about your last three months of spending but also check carefully whether all your income counts and then how likely are you to be approved?

Mistake 5: Refinancing before you have built 20 per cent equity

If you reborrow more than 80 per cent of a property’s worth, you will potentially trigger a second round of lenders’ mortgage insurance. This is sham insurance for which you pay the premiums but from which the lender benefits. It covers any shortfall in what you owe versus what a lender gets from a forced sale of your property, if you can no longer meet repayments.

And with the insurance possibly costing tens of thousands of dollars, refinancing is very unlikely to be worth it until you have 20 per cent equity.

If you have though, and you have held a home loan for more than two years, it’s high time you moved lenders.

Just avoid the huge traps.

Nicole Pedersen-McKinnon is the author of How to Get Mortgage-Free Like Me, available at www.nicolessmartmoney.com. Follow Nicole on Twitter and Instagram.

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