by Lisa Montgomery, Head of Consumer Advocacy 25/06/2007

Refinancing a home loan means either switching your loan from one lender to another, or changing to a different type of loan with your current lender.

“Most people refinance their home loan with the aim of benefiting their hip pocket and there are often substantial savings to be made,” says Resi Mortgage Corporation Head of Consumer Advocacy, Lisa Montgomery.

“However that isn’t always the case and it is vital that you do your homework and make sure that the benefits will outweigh the costs before deciding to refinance your loan.”

 The first step toward refinancing a home loan is to research whether you can get a better home loan deal than you have currently.

“It’s important not only to look at interest rates, but also take account of fees and loan features,” says Montgomery. “Look at the comparison rate to make sure you aren’t being taken in by low introductory rates which may end up costing you more in the end.”

“The next step is to ask your current lender to detail all costs involved in leaving your current loan, normally known as exit fees,” she adds.

Exit fees can be quite high for fixed rate loans, but tend to be far less for variable rate loans, particularly when the loan has been reducing over the years.
 
“This can also be a good time to let your lender know that you’re thinking of leaving them – giving them the chance to come up with a better deal to keep your business,” explains Montgomery.

If your current lender does not come back with an attractive alternative offer, says Montgomery, it is time to approach another lender and ask them to detail all costs involved in refinancing with them – such as valuation and legal fees, application fees, stamp duty on the mortgage, and mortgage insurance.

However she warns consumers to beware of the promise of free holidays, plasma TV, airline flights, and petrol, if they refinance with a new lender.

 “What borrowers may not realise is, there is no such thing as a “free” gift with their loan” explains Ms Montgomery. “Invariably they will be paying for their own gift through certain loan conditions such as an establishment fee, a higher interest rate or inflexible loan terms.”

For example, while the offer of a plasma TV costing around $3000 may seem attractive in the short-term, when compared to a 0.25% interest rate differential on a $240,000 home loan over 25 years – the decision could cost the borrower $12,000 in interest.

Montgomery says other reasons for refinancing a home loan include raising money to pay for renovations or investments, or consolidating a range of high interest rate personal loans and credit card debts into one lower rate home loan.

Consolidating personal debts can save considerable money when you consider that current credit card interest rates are normally around the 15% mark and personal loans around 10 - 12% - in comparison with most home loan products rates at less than 8%.

“It is not unusual for people to find they can reduce their monthly debts by hundreds of dollars, or even halve them, simply through consolidating their debts into their home loans,” she added.

Montgomery advises to only proceed if the interest savings gained from transferring to the new loan are significantly higher than the costs involved.

Ms Montgomery says the old adage of ‘looking before you leap’ applies before signing on the dotted line for any loan, and never more so than in the current competitive loan environment.

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