Are you constantly thinking of your finances? You are not alone.

Financial stress is rapidly rising in Australia. With the added consequences of COVID-19 pandemic on the economy, one in two (almost 47%) of Australians suffered through risen financial stress during the last few months, according to a recent study by Australian National University. As Australia emerges out of the pandemic, real estate experts, conveyancers and mortgage brokers find themselves busier than ever with clients inclining towards their refinancing options to balance their expenses. Refinancing can be a great solution to bring back some stability to your financial situation, however, there are some key traps that you must be aware of before you think of refinancing.  

But First, What Is Refinancing? 

Refinancing involves obtaining a new mortgage to pay off an existing loan. The process involves the services of a mortgage broker or financial lender to help you reach an informed decision regarding your current and new mortgage finances. During refinancing, a business or an individual may opt for terms and conditions that are more favourable to their current financial circumstances. Refinancing may seem more viable if the new contract offers a better interest rate or payment schedule, however it may not always be the smartest move, depending on your financial situation.  

Here are 4 traps to avoid when refinancing your mortgage: 

1. The Interest Rate Trap 

While a more competitive interest rate may look more appealing at first, it can include some hidden fees that can cost you more in the long run. Instead of letting the lower interest rate drive your decision, look at the time of the mortgage term too. If your interest rate is low but your mortgage term is longer, you would end up paying a higher total amount to settle. 

Some additional costs with refinancing may include (but not limited to): 

• Legal fees 
• Stamp duty 
• New application fee 
• State Government fee 
• Lender’s valuation fee 

Work with our conveyancing team to understand all costs involved related to your contract and property. Your bytherules conveyancer will also be able to guide you with a free contract review to ensure all areas are covered.  

2. The Home Equity Trap

Regardless of the commonly perceived notion, refinancing is not an opportunity to borrow against your home equity. Although refinancing to renovate your house or buy a new car or simply to keep your head above water may sound a wise decision, it may cost you your secured financial cushioning in the future. Especially if you have no other financial backup, using your home equity for a non-essential expense may not be the wisest.  

3. The Bank Loyalty Trap 

You may have remained with one bank for more than a decade. You may remember all the account details on the tip of your fingers but this loyalty may prove to be a huge drawback when you decide to refinance. Different banks offer different terms and conditions. Shop the market and see who offers the best deal. A new bank may offer a better and more cost-effective deal than your current bank. Compare your options before you take the final decision.  

4. The Best Offer Trap 

Some lenders or banks may present an offer of a lifetime that may seem to be tailored-made just for you. Unfortunately, that may not always be the case. Rates may change at any time, especially after the recent events. While weighing your options, you may come across a very appealing offer. In such case, check the history of the lender and whether or not they pass on subsequent interest rate cuts in a timely manner. Take professional guidance from your mortgage broker or your bank before you sign a deal. 

Finally, reassess your own financial circumstances before you decide to refinance your home loan. If your current financial or occupational situation is different than when you first took out your mortgage, it is wiser to reassess the product at hand based on your current circumstances. If you or your partner has retired or stopped working for any reason, or if you started your own business, your ability to repay will be assessed differently than earlier. In this case, a healthy relationship with your current bank or lender may come in handy. 

At last, it is all about weighing your options wisely and knowing when to seek professional guidance.  

When your finance is all sorted out and you are ready for a free contract review and some incredibly easy conveyancing, you can reach out to us for your 10-second quote.