What is Mortgage Refinancing?
People refinance by moving to another loan but on new terms. Mortgage refinancing is something which can also enable you to borrow more money, to consolidate debts or gain access to more funds for other purposes as long as you can afford to meet the repayments on the larger loan amount.
When should I refinance?
In the past, most people who took out a home loan continued with it until they had paid it off. These days, people refinance their home loan much more frequently. The average duration of a home loan in Australia now is just 4-5 years. You should consider re-financing when your circumstances change, if you want to see if you can save money with a lower rate or a more-suitable loan, or when it suits you to shop around.
Mortgage Refinancing on Home Loans
If you want to refinance to a lower monthly repayment you can do this by mortgage refinancing your existing loan at a lower rate, which will decrease your monthly payment. Refinancing your loan and fixing your rate when rates are low could save you thousands over the term of your loan. You can also lower your monthly payment by extending your loan term. Spreading your loan repayments over a 30 year term as opposed to a 25 year term will reduce your monthly commitments but you will pay more money in the long term.
Mortgage Refinancing to Consolidate Debts
If you want to consolidate your debt, for example your existing credit cards, personal loans, car leases and other debts you can refinance and replace all of these with one loan, which could result in a significant saving. You can be paying up to 18% p.a. on personal and unsecured loans as opposed to half that interest rate on a secured mortgage loan.
A refinance that combines all existing debts into one loan with a much lower interest rate has the benefit of enabling the borrower to save money, to get ahead of debts. And if the savings are used to making extra loan repayments then the debt will be paid off sooner.
A refinance and debt consolidation loan is a smart solution for anyone who has a large amount money going out each month into different repayments at varying interest rates. It also simplifies things at tax time and should reduce your overall account keeping and direct debit costs because one loan will mean just one lot of fees.
Mortgage Refinancing for Renovation
If you carry out renovations, it often makes sense to refinance your home loan and take out a construction loan or line of credit so you only pay interest as building progresses and funds are drawn to pay the builder.
If the renovations planned are merely extensions or internal upgrading of kitchens or bathrooms then a Line of Credit facility may be a good option in that you can control the progressive payments to your renovation contractors or suppliers. These types of renovations do not generally require progressive inspections of the property as is the case with a knock down and re-build or house and land package.
The extent of the renovations will determine whether you need to refinance into a construction loan or whether you can manage with a line of credit.
Mortgage Refinancing to tap into your home equity
Over recent years in Australia’s property market houses have appreciated at a significant rate. e.g. a home you bought for $300,000 five years ago, might now be worth $500,000. Refinancing to tap into equity, has become very common as borrowers seek to purchase their first investment property or invest in the share market.
Mortgage Refinancing to a more Service Oriented Lender
Some lenders offer friendlier, more customer-focused service than others and if a borrower feels undervalued, or that talking to their lender is too hard (because they go around in a whirl of automated telephone options at every juncture) then it can be in their interests to refinance their mortgage.
Things to consider when Mortgage Refinancing
Whilst deciding to refinance your mortgage, it is always good to sit down and do your own calculations. You will need to determine whether you will get a better interest rate when you refinance. You also need to look at the fine print of your mortgage and consider any fees that may apply (break costs) when you exit your existing mortgage to refinance. You also need to consider the new fees associated with refinancing to a new lender.
It is important to remember, that when deciding to refinance, not everyone comes out ahead. Some lenders have high early repayment fees while others may to be prepared to waive these, particularly if you choose to refinance with the same lender, but choose a different loan product more suited to your needs.
Early repayment fees (that apply to variable loans settled prior to July 1st 2011) usually drop off after 5 years (on variable rate loans). If you discharge and refinance before then the costs may be such that a refinance is simply not viable option for you. Therefore, each of these points should be taken into consideration when deciding if mortgage refinancing is right for you.