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5 traps to avoid when refinancing your home loan

·3-min read
Houses in Melkbourne
Cheap introductory rates and fees are just some of the refinancing traps to be aware of. (Source: Getty)

Australia saw its fourth cash rate hike in a row last week, which means higher repayments for most variable-rate mortgage holders.

You may be thinking about refinancing your home loan to save money, but be warned: there’s more to consider than just the interest rate on offer.

Canstar spokesperson Steve Mickenbecker reminded mortgage holders to be wary of discounts designed to entice new customers.

Banks tend to price home loans competitively to attract new business, and then usually leave existing customers on a market rate that’s less competitive.

“Effectively, the back book, the older loans, subsidise new lending written at finer margins,” he said.

He said customers who had borrowed from major banks around five or six years ago were likely to be on package loans that were, on average, 1.36 per cent higher than the average of the four banks’ lowest-priced loans.

“The difference in repayment is around $400 a month, putting a huge dent in household budgets,” Mickenbecker said.

“Borrowers who have been in their loans for five or 10 years, and who have never renegotiated with their bank, are almost certainly paying too much, and it is way too much to ignore,” he said.

Claire Frawley, personal finance expert at Mozo, agreed that introductory offers were something to be mindful of.

She pointed to four other traps to avoid when refinancing a home loan.

Time frame matters

She said it was important to make sure you weren’t extending your mortgage when refinancing.

“This will add a significant amount of money to the interest you will pay on your loan,” she said.

“For example, if you have a 25-year, $500,000 loan and you refinance from 4.10 per cent to 3.60 per cent, your repayment will decrease $137, from $2,667 a month to $2,530.

“However, if you refinanced the same amount but increased the length of the loan to 30 years, your repayment would be even lower, $2,273 a month, but you would be paying $59,358 more in interest over the length of your mortgage.”

Check for fees

Frawley also said it was important to watch out for ongoing fees on your mortgage.

Most lenders charged a one-off upfront or discharge fee, but there were also ongoing costs like annual service fees that “really add up over time”.

Read the fine print

Frawley also said there could be fees attached to the redraw facility.

“If you are looking for a mortgage with a redraw facility, it’s important to look at the fees and the number of free redraws you can make.

“Many mortgages only allow a set number, but there are a number of lenders that charge for each withdrawal.”

Do you need an offset account right now?

Frawley said that while offset accounts were useful tools to reduce the interest you paid on your mortgage, they were a feature most banks charged for.

“So, if your situation has changed or you don’t think you are in a position to use an offset account, it might be good to look for a basic mortgage with less features,” she said.

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