As a home owner with a mortgage, chances are you’ve heard of the term ‘refinancing’. Refinancing involves reviewing your current mortgage, and potentially swapping your loan to another lender who can better meet your current needs, wants and circumstances.
Refinancing can also allow you to consolidate your debts or pay down your mortgage more quickly.
Another common reason borrowers look to refinance is so that they can access equity – the amount you’d get from selling your home after settling any associated loans, such as a mortgage on that property, and any other costs associated with the property. Depending on that amount, you may be able to access equity in the property without having to sell it, for example, to make home renovations or to buy an investment property.
However, refinancing is not suited to everyone. There are many different factors you will need to consider when thinking about refinancing a loan.
So how will you know that refinancing is the right option for you?
The first step is to speak to a professional, such as a finance broker, about your needs and whether you can afford a different loan structure or other change to your mortgage, particularly if you have more than one property.
Before you initiate an application to refinance, your broker will need to assess your needs and objectives as well as your current financial situation.
Are you looking to pay less interest?
Some people are savvy researchers and will want to take advantage of a lower interest rate from another lender should that be available to reduce repayments. If you aim for a lower interest rate, this could potentially save you a lot of money in the long term.
While saving money is often one of the biggest benefits of refinancing, it may not be as straightforward as that and careful consideration is required.
At this point, your broker will need to find out about your existing loan, repayments and current loan structure. They’ll also need to find out more about your current financial situation, including your income, any other current debts and about any assets you own.
The current value of the property is also taken into consideration, so your broker will have access to current data that will indicate what your property is likely to be worth.
Your broker will then review the various loan options and figure out whether it’s worth it for you to refinance. Sometimes it’s not worth it if it’s only going to save a couple of hundred dollars a year, particularly when you take into consideration the exit and application fees involved. But if it’s going to save upward of $1,000 a year, refinancing might be a sensible approach.
In some cases, your broker can tell you if getting a lower interest rate from your current lender can be achieved without refinancing.
Do you want to change your loan type?
One of the risks of refinancing your home loan is that you may need to pay Lender’s Mortgage Insurance (LMI)* to your new lender if the loan exceeds 80% of the value of the property. If switching your loan means you will need to pay LMI again, it may not be worth refinancing.
If you do decide to go down the refinancing path, working with a broker rather than going straight to a lender has advantages. Brokers have access to loan options from a range of different lenders (34 on average), and if there’s a better opportunity for you, they’re usually able to access it.
It is important to consider that when you take up a new home loan, it can incur exit fees and may not have all the features your existing home loan has.
Have your circumstances changed?
If you had a recent major life change such as a loss of income or a change in marital status, you might be looking to refinance.
If you want to refinance to lower lending costs to help you manage your monthly repayments, speak to us and we can negotiate with your current lender for a rate suitable to your current situation.
We can also help you look at alternate options to consolidate your personal loans and credit cards into the one loan. This could help you in lowering your monthly repayments, or help you keep your repayments on time and even save you interest in the long-term.
*LMI protects the lender against potential loss.
Reproduced with the permission of the Mortgage and Finance Association of Australia (MFAA)
This provides general information and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances before deciding what’s right for you. Although the information is from sources considered reliable, we do not guarantee that it is accurate or complete. You should not rely upon it and should seek qualified advice before making any investment decision. Except where liability under any statute cannot be excluded, we do not accept any liability (whether under contract, tort or otherwise) for any resulting loss or damage of the reader or any other person. Past performance is not a reliable guide to future returns.
Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business nor our Licensee takes any responsibility for any action or any service provided by the author.
Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.