Better interest rates, lower repayments, paying for that longed for renovation or consolidating other debts, there many reasons why you might want to consider refinancing.
What is refinancing?
Refinancing is when you pay out your existing loan and replace it with a new loan, either with a new lender or your existing lender. The loan may be for the same amount as you have currently, or if your home has grown in value over the time you have had your existing loan, you might look to increase the value of the loan and access some of the equity you have built up.
Why would you refinance?
Circumstances change over time and what was right for you when you first set up your loan may not be the best solution for you in the current market. It is a good idea to review your existing loan periodically to see if it continues to meet your needs, or if you might be better off refinancing.
Weighing up the benefits v’s the costs
Refinancing involves some benefits and some costs depending on your situation. Whilst the benefits can be great, it is important to weigh these up against the costs to make sure that refinancing is the right option.
What are some of the benefits of refinancing?
To get a better interest rate and reduce your monthly payments
- If your current loan isn’t competitive in the market, you may be able to save a considerable amount on your monthly payments by switching to a new loan.
To access some of the equity in your home
- You may want to free up some cash by tapping into the equity in your home. This could be to renovate, purchase an investment property, for a car or education costs (or just to run away to Las Vegas for awhile!).
To change lenders or the features of your loan
- If your current lender isn’t providing you with the service, or loan features you are looking for, you might be considering switching to another lender, or loan.
To consolidate debts
- If you have credit card, personal finance loans or store card debt, these will generally be at higher interest rates than your home loan, and you may have several payments to make every month. Refinancing can help to pay out these loans and consolidate your debt into your mortgage, creating one payment at the best rates on the market.
Why might you not refinance?
The costs involved
Depending on your circumstances there may be costs involved in refinancing which will have to be weighed up against the benefits.
- Exit fees
Exit fees are costs applied when you pay out a loan early. These fees were banned in new loans taken out after 1 July 2011, however if you have a loan that pre dates this these may apply. Your loan contract will specify what these costs are and they may be only applicable for a certain time period (say the first 3 years of your loan).
- Break costs
Generally fixed interest rates are for a specified time period. To end the loan before this contract time period can involve break costs.
- Loan set up costs & Government Charges
A loan application fee, valuation fee or settlement fee may be applicable, or these may be waived or negotiable. Your broker will also be able to let you know of any government charges involved in setting up with a new lender and discharging your mortgage from your current lender.
Meeting Lender Requirements
- There may be reasons that your current circumstances don’t meet lender requirements, so the timing isn’t right for refinancing. This could be things such as existing debts or liabilities, or income levels for servicing a loan.
Cara and Peter – A case study in Refinancing
Cara and Peter recently refinanced their house in Doncaster.
They originally purchased their house in May 2011 for $830,000 and took out a loan for $600,000 payable over 30 years. Their current loan balance was $550,000, with a variable rate of 4.75% and monthly repayments of principal and interest $2,870.
They refinanced their loan with another lender and secured a 0.9% discount off the variable rate. They also took the opportunity to increase the valuation of their property, up to $1.1m from $830,000, freeing up $270,000 in cash. They used this cash to pay off an outstanding credit card bill of $33,000 and a store card with $8,500 owing, then put the remainder of the cash in their offset account.
Their refinancing costs were $170 in Mortgage Discharge fees to their existing lender and $360 in costs to their new lender (for Mortgage Registration and Settlement Costs). The new lender waived the loan establishment fee.
Given that with the refinance they are saving $4,950 in interest annually (0.9% of $550,000), it has only taken one month to recoup the costs of the change and they are now effectively saving $412 every month in interest. They also have the flexibility of having cash available, at their low home loan rate, rather than at the higher rate they were paying on credit and store cards.
Deciding whether to refinance
Working out whether to refinance comes down to weighing up the pros and the cons for your individual situation. Your broker can provide the information needed to help you to weigh these up. If refinancing is the right way to go for you, they can then assist you by negotiating the best loan for you in the market and handling the loan process to make it as simple as possible.
Thinking of refinancing? Or undertaking a Home Loan Health Check?
Douglas Piening is a Mortgage and Finance Broker with Piening Financial Solutions and is passionate about providing advice you can trust. Whether it’s buying a home, refinancing a loan, investing, building or renovating, Doug brings a wealth of knowledge and expertise to assist with your lending needs.
You can contact Doug at email@example.com or (m) 0408 671 524.
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This information is of a general nature only and does not constitute professional advice. You should always seek professional advice in relation to your particular circumstances.