What To Consider Before Refinancing

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Even with tighter lender approval processes, changes to living expense calculations, and not always guaranteed to be able to borrow what you originally borrowed, refinancing can be a strategic, cost effective option for home owners

However to ensure you receive a favourable deal, ask yourself the following:

1. Have my circumstances changed?

Since establishing your existing loan, you might have had children, been made redundant, been promoted, taken out new debts or increased your assets. Your employment, earning potential and savings are among the key factors that lenders consider when assessing if you have the capability to meet your mortgage repayments.

If your circumstances have changed, it’s essential to demonstrate that your ability to pay your mortgage is unaffected. One way to do this is to show you have enough savings to act as a safety net should you run into trouble with your mortgage repayments.

2. What refinancing costs will I have to pay?

To exit your current mortgage, you may need to pay a discharge fee and government charges. For your new loan, you may be up for application or mortgage registration fees. Even if you’re staying with the same lender, you may be charged a switching fee to refinance to a different mortgage product.

If your borrowings are over 80% of the property value when you refinance, you will be up for Lenders Mortgage Insurance (LMI), even though you may have already paid it once. With falling property prices there is the risk that your property has dropped in value and LMI is now applicable.

The costs are even higher if you currently have a fixed rate home loan that you intend to break. Have a close look at your fixed term contract to determine the costs, which may vary according to the duration of your loan and the interest rate.

3. Do I plan to stay in my home for several years?

It may take you a while to recoup the costs of refinancing, so you’re unlikely to get the full financial benefits if you sell up soon. Similarly, refinancing when you only have a small amount left on your loan may not bring many advantages as the cost savings will probably be marginal.

4. Can I put new debt on hold?

Good financial planning for credit applications or big purchases will support your refinance.  When assessing your application, lenders will look at how much debt you have and how this affects your ability to afford the repayments.

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