All the recent talk about our record-setting low interest rates will have inspired quite a few Victorian homeowners to take a fresh look at their current home loan and to consider whether now might be a good time to refinance.
Any decision about whether it’s time to refinance, or whether to lock-in your interest rate, should only be taken after getting objective professional advice. But it’s important to keep in mind that there are some traps involved in refinancing your home loan that are worth considering.
Obviously, the team at Ian Reid Vendor Advocates are not about to give you advice on your mortgage. However, we do talk to a lot of mortgage advisors, so we’re happy to pass on some tips on what to watch out for. These include:
- Borrowing more money
If you’ve had your loan for several years, the value of your property is likely to have increased quite substantially. That may mean that your lender could offer you a larger loan when you refinance. Don’t forget why you wanted to refinance in the first place…it probably wasn’t to end up with a bigger loan that takes you longer to repay in the long run!
- Consolidating debts
Alongside offering a larger loan, your lender may also suggest that you add any smaller debts such as credit cards or personal loans to your new home loan. The thought of reducing your interest rate on these debts to the cheaper mortgage loan rate may sound appealing at first, but keep in mind that your home loan is a long-term debt, which could means you end up paying off your credit card debt over the next 25 to 30 years.
- Honeymoon rates
Lenders often advertise special introductory deals or “honeymoon rates” to attract new business. It is important to clarify how long these rates will last, and what rates your loan will revert to once that initial period is over. Checking the published ‘comparison rate’ is a good way to compare ‘apples with apples’.
- Extending your loan term
One of the most common factors that people overlook when it’s time to refinance is that by taking out a new loan, they go from a loan term that has been reduced over time to an entirely new one. For example, if your original loan was for 25 years, and you’ve been paying it off for 10 years, you may find yourself adding an extra 10 or 15 years of loan repayments when you refinance. Give very careful thought to the term of your new loan.
As we mentioned earlier, our recommendation is that you should always talk to an experienced broker before you make any decisions on refinancing. Not only will they be able to help you decide whether now is the right time to refinance, they will also be able to negotiate with both old and new lenders to ensure you get the best deal.
Of course, for more general advice on how to avoid costly mistakes when making decisions about your property, it’s worth reading our free booklet“Fatal Real Estate Traps Exposed”. It’s available right here on our website, so be sure to get a copy while you’re here.