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Which is better: refinancing or applying for a new mortgage?

By Emma Smith

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Refinancing a home loan has become an increasingly popular option for homeowners looking to upgrade or renovate their home or buy an investment property. But are you better off speaking to your current lender about increasing your mortgage or looking for a new lender altogether? We explore the steps you should take to work out which is right for you.

Understand what kind home loan deal you’re currently on

Before refinancing, you should always make sure you understand exactly what kind of deal you’re already receiving on your home loan. One of the easiest ways to do this is to ask your lender for a key facts sheet about your mortgage.

This document, which lenders are required to provide by law, explains your home loan’s features in a standardised way so that you can easily compare products. This must include:

  • Your interest rate and loan principal
  • A personalised comparison rate or the real rate of interest you pay after fees and charges are added (other than government charges)
  • Details of the effect an interest rate rise will have on your repayments
  • The total amount you would pay back at current rates
  • The annual cost of your home loan.

Compare your current home loan with other lenders

Using this information you’ll be able to make a quick comparison between your home loan and what else is on the market. Although, when you compare home loans it’s important that you consider features – such as an offset account or redraw facility – as well as the cost.

These days, it’s easy to compare loans and narrow down what’s right for you, using a home loan comparison site. Alternatively, a mortgage broker can do this for you, giving you a quick understanding of what else is on the market and what might suit you.

Ask your lender for their very best deal

The truth is that lenders often reserve their best deals for new customers, not existing ones – at least not until they ask. So armed with the information you have, ask your current lender what is the very best deal they can do if you do choose to stay. Sometimes, they’ll be happy to reduce their rate just to keep your business.

Get the full picture on any fees

When you switch lenders, you’re likely to be up for new fees, including a loan establishment fee and termination fees on your existing loan. You may even have to pay transfer duty or stamp duty on your new mortgage (although, this is substantially cheaper than the mortgage duty you would have paid on your home). And, if you’re borrowing more than 80% of the property’s value, you may be up for Lenders Mortgage Insurance (LMI).  By staying with the same lender, you may be able to avoid some of these fees.

You should also analyse and compare the ongoing fees and charges that you’ll have to pay.

Understand the refinancing process

Finally, make sure you understand the process of switching lenders compared to staying with your existing one. Often your current lender will streamline the approval process, given they have your existing information on file.

That said, these days most lenders can approve loans and have you up and running with your new loan quickly – often within just a week or two.

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