Common Refinancing Mistakes to Avoid

Refinancing your home loan can save you tens of thousands of dollars for your loan term. After weighing the pros and cons and deciding that refinancing your home loan is the right choice, you’re well on your way to getting a better deal. But before you decide on your new home loan, you’ll want to make sure you can avoid falling into any of the common refinancing traps.  

Taking the time to do a little extra research and staying savvy can help you get the best deal possible on your refinancing. Refinancing can allow you to maximise your savings, unlock extra loan features and breathe a little easier. Just make sure you keep an eye out for these classic red flags:  

Mistake #1: Skipping over the comparison rate  

A comparison rate isn’t a perfect guide, but it gives you an at-a-glance idea of the price you’ll expect to pay for a home loan. For any home loan offer, the comparison rate is an important detail to give you a better idea of a home loan’s genuine value. When considering additional fees and costs, a comparison rate can be a much more accurate measure of a home loan’s cost (as opposed to only the advertised rate). 

If you’re interested in refinancing your home loan, you should pay attention to the comparison rates available. While you’re at it, you should also look at the comparison rate for your current loan. Suppose a potential lender has a more significant comparison rate than you currently pay. In that case, you’re better off looking for a better deal elsewhere.  

Mistake #2: Adding more time to the length your home loan  

When refinancing your home loan, the new lender will likely give you the option to take out a new 30-year home loan term. Any borrower should be very wary of accepting this. If you’ve already been paying your home loan off for several years, switching to a new, longer 30-year term means you’re extending the amount of time it’ll take you to be debt-free. You’ll end up paying a larger amount in interest overall.  

In some cases, however, it might be necessary or unavoidable to add more years to your loan term. For instance, if you’re experiencing financial hardship, adding more time to your home loan term could reduce your monthly repayments and allow you to get back on track or cover your biggest financial priorities.   

 Mistake #3: Being drawn in by ‘honeymoon’ interest rates  

In a competitive home loan market, lenders often offer introductory rates and cashback offers as an incentive to entice new customers. These rate offers are usually called ‘introductory variable rates’ or ‘honeymoon’ rates. For a short period, you’ll be guaranteed a significant discount. But after that period ends and the ‘honeymoon’ is over, that guarantee no longer applies. In some cases, there may even be additional fees or costs that weren’t discussed at the time of application.   

This doesn’t necessarily mean that introductory variable rate loans are a bad deal. There are often a extensive range of offers available, and what type or style of loan you need will depend on your own circumstances.   

That being said, if you’re refinancing to a ‘honeymoon rate’ home loan product, you should pay close attention to the rate you’ll switch to after the introductory period is over. A good benchmark will involve paying close attention to the home loan lender’s current standard variable rate. If the lender you’re looking at has a higher standard variable rate than the lender you’re currently with, it’s likely the deal you think you could be getting won’t add up to any significant savings in the long-run.