Should I Refinance my Mortgage?
We are often accused of living too fast, looking for that instant gratification and being unwilling to stick it out when times get tough. However this is can be about more than just a conversation with your parents because you may be unhappy with your home loan, or be looking for ways to save money or pay your loan off faster, but you’re not sure whether your reasons are justified, or whether you are just looking for any easier way.
The first thing to remember is that it is not a bad thing to look for an easier way to repay your home loan because chances are it’s out there. Home loans, lenders and products, not to mention interest rates, contained by the day and if you’re alone is several years old could be a better solution for you. You’re also not alone because the average Australian home loan is held for between 4 to 5 years and if you are struggling with any of the following reasons the answer may be yes, you should refinance your mortgage.
Should I refinance for a lower interest rate?
It is no surprise that this is the most common reason Australians refinance their mortgages but it is not always the best. Before you refinance your home loan in search of a lower rate, make sure you calculate all of the fees and charges which will be associated with your new loan, as well as comparing the interest rates because it is your home loan product as a whole which will save you money, not just the interest.
Should I refinance for a more flexible mortgage?
It can be very costly to assume that features and functionalities are automatically included in your home loan and if you applied for your existing home without checking exactly which features you were allowed to use and which would cost you money then you may have found that you can’t actually use your loan in the way you wanted. That means that now is the perfect time to refinance because you know exactly the features you wish you had, and the ones you don’t use so you can look at those in your new loan.
Should I refinance if I’m renovating?
There are several reasons you may want to refinance if you are renovating:
- To access the equity in your loan to fund the renovations. If your home is valued at more than the amount you owe on your loan you can refinance your loan to access that equity and then draw down on that amount to pay for your renovations. While you can refinance to access the equity in your home to repay bad debts, you can also use those funds for home renovation to capitalise on your property. Or you can use those funds to help you secure an investment property which is a very tax effective asset
- To save you money during your renovations. When you are renovating your home you are channelling a lot of your extra money into contractors, fixtures and fittings and this can be the perfect time to refinance to an interest only loan to reduce the amount you need to pay towards your loan each month.
- To consolidate the costs of your renovation loan. If you used a separate loan to fund your renovations, once the renovations are complete you may want to consider having your home valued with its new improvements, and refinancing your renovation debt into your home loan at a lower interest rate.
- For more flexibility. A basic home loan can suit you when you first have a mortgage because it allows you to concentrate on making repayments without being distracted, or being charged for, additional fees. However if you are ready to really take control of your mortgage, you may want more flexibility with the variable rate loan which allows you to make additional repayments or example, and the loan which allows you the flexibility to access those additional payments using a redraw facility. A more flexible home loan may also allow you to combine all of your savings and transaction accounts into your home loan account to offset your interest and make sure you never miss a repayment again.
- You are buying a new home. When you move home you will also have to move loans because even if the value of your new home is equal to the amount still outstanding on your current home loan there are still fees to pay to transfer the security of the new property. Therefore even if you have portability feature on your loan portability fee can often be just as much as the exit fees and new valuation and stamp duty charges so you may be better off moving into your new home and moving into a new loan at the same time.
Should a refinance to access my equity?
You can access the equity built up in your home for reasons other than a renovation. You may want to refinance to access your equity for holiday, a new car, or to build your investment portfolio.
Should I refinance if I can’t afford my mortgage?
If you have found that you are struggling with your repayments you may not think you are in a position to refinance your mortgage. However if you approach your lender when you first find you are struggling they are likely to do everything they can to avoid you defaulting on your loan. Therefore if you find you can’t comfortably meet your mortgage repayments any more you can refinance your loan to extend the term and reduce the payments, or switch two or more basic loan with a lower interest rate.
What happens when you refinance
In order to refinance your existing home loan you will first have to undertake considerable research so that you can find a new loan that fits in with what you are looking for. Once satisfied the new loan will deliver a better result than your old mortgage, you will have to make application the same as you did originally to get your first home loan. Once the new loan is approved, either from a new lender or even from your existing lender if the new mortgage is being offered by the same home loan provider, the first step will be to pay off the old home loan in full. Any monies left over can be dispersed as you wish.
Beware of the dangers in refinancing
Before deciding to refinance however, there are some consideration that you should take into account. One of these is that a lower interest rate alone does not necessarily mean that the mortgage will be cheaper that the loan you already have. Some loans are promoted on the basis of a lower than average interest rate but when you look closely at the fine print you may find that the fees and charges will more than make up for the lower interest rate. It often happens that a loan with a low interest rate can actually cost you more when these fees and charges are added up. The lower interest rate may also mean a loss of flexibility in your home loan. You may lose the ability to make additional payments when you have spare money to invest such as any bonus in wages you might receive from your place of employment every now and again. In fact some lenders even charge you a penalty for wanting to do so. This all means you must be careful in what you are doing and know exactly what the result will be if you decide to go ahead.
A further consideration will be the cost of any exit fees that are charged before you can be released from your old home loan obligations. Sometimes these fees can be quite substantial, especially in the early years of your existing mortgage. On the other hand some lenders discontinue the exit fee after you have been repaying the loan for five years or more.
Related posts:
- Cash Out Mortgage Refinance
- Refinance Options
- Cash Out Refinance
- Refinance Real Estate Loan
- When would I refinance my Mortgage?
- House Mortgage Refinance
- The Average Types Of Refinance Fees
- Mortgage Refinance Calculator
- When to refinance your Mortgage
- Need to Refinance
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