The potential pitfalls
With every change to your investment strategy, or property loans, there is the potential for a downside and refinancing is no different.
Application fees, lenders mortgage insurance, registration fees and other costs may be applicable.
It’s also worth noting the rules that exist around break fees. If you have a fixed-rate loan, or a variable-rate that dates to before 1 July 2011, you may be up for some hefty costs should you seek to refinance.
You need to weigh up your options and ensure that the numbers stack up in favour of refinancing. Your lender should be able to assist you with this. Refinancing may be a poor decision if you are already through the majority of your loan term, your credit history is poor due to outstanding debts or you have uncertain income over the length of a loan. These can inhibit you from achieving a better set of circumstances in a refinancing situation.
Similarly, if you have a 90% loan or above, you’ll want to ensure you know what your lender does and does not allow. If you’re looking to purchase an investment by refinancing and borrowing against equity you have built up in the property, remember that you will generally only be able to do so if the loan is less than 90% of the new value of your property.
In the event of refinance where the LVR is greater than 80%, consumers should ask about the cost of any lenders mortgage insurance premium, to ensure that any rate benefit is not eroded by this cost.
This is particularly important as the fee is capitalised to the loan principle, and the effect of compound interest can further inflate the premium amount paid over time.
This article is from Property Observer's free ebook Mastering the Art of Refinancing: 12 tips for success and key things to consider.