What should I be looking for when I refinance my loan?
When considering a refinance of your home or investment loan, you should probably ask yourself, what do I hope to achieve from a refinance?
Generally, the obvious answer would be to save the amount of interest paid by you over the life of the loan.
There are other critical factors that come into play when thinking about a refinance of your loan such as;
• Lowering your monthly commitment (repayment)
• Consolidating other debt into your loan
• Provide spare funds
• Different type of loan for flexibility
• Investment opportunities
• Financial Security
Let’s take a look at all of these refinance options in more detail shall we?
1. Refinance to Lower Monthly Commitment (Repayment)
A refinance of your existing loan to a new loan with a lower interest rate will obviously entail a reduced monthly repayment. Added to this, the fact that the refinance involves a new loan term (generally 25 or 30 years in Australia), this will also assist in reducing your current repayment commitment that may be based on a smaller remaining term.
For example, say you borrowed $250,000 on a 25 year term and after 10 years you have only $175,000 left on your mortgage. If your monthly repayments are too much, by refinancing that $175,000 back on a 25 or 30 year loan term, you will greatly reduce that monthly commitment. If this helps ease the stress of a tight cash flow, it might just be a worthwhile refinance option.
2. Refinance to Consolidate other Debt
Are you in the unenviable position where you have high personal debt such as credit cards maximised to the limit at a high interest rate (approx 18% in Australia), a personal loan (approx 13% in Australia) and maybe even a car loan (approx 10% in Australia) and are struggling to make the monthly repayments?
One way to alleviate the high interest you pay on your personal debt would be to refinance these debts into your home loan at a home loan rate. A refinance of your high interest debt will enable you to substantially reduce your monthly commitment and thus increase your cash flow.
It is important to remember however, that given the fact that your refinance into the home loan extends the term of your personal debt over a longer period, you will feasibly pay more interest than you otherwise would have overall.
For easing of cash flow burden and maintenance of debt with the one lender, this would be a suitable refinance option.
3. Refinance to Provide Spare Funds
We could all use some spare cash from time to time. This is one refinance option that appeals to any type of borrower. Imagine having some spare funds to renovate the house, take a holiday, buy some shares, etc.
Well, a refinance of your loan allowing you to “tap in” on some of that available equity can make these a reality. The beauty of this refinance option is that in most cases, until you actually need to use the available funds, you are not charged interest on them.
Therefore, it’s not costing you anything to have the funds just waiting for you to use them! Perhaps when considering this refinance option, you also consider the type of product you refinance into such as a Line of Credit, Offset Loan (popular alternative to standard loans in Australia).
This refinance option provides a fantastic opportunity for home or investment property owners to enhance their position or just plain spoil themselves!
4. Refinance for Flexibility
Are you sure that your existing loan is working for you? Has it been some time since your loan settled and there have since been a range of new and exciting products that are now available to you?
The answer is a refinance to a more flexible and cost effective loan product. With the advent of 100% Offset loans (available with most lenders in Australia) and significant advances with Lines of Credit just to name a couple, now could be a good time to consider a refinance away from that tired standard non-flexible loan product that’s costing you hard earned money!
Do your research and sums and you may find a refinance to a more flexible product could save you thousands of dollars and more importantly, help you pay that loan off sooner.
5. Refinance for Investment Opportunities
Are you a seasoned investor or someone wanting to create an investment portfolio? Your current loan may be suitable for owning a home but does it really lend itself to you creating or enhancing a wealth strategy?
A refinance to specific loan products that are tailored to meet the needs of investors will solve your problem. Products that allow you to dissect investment portions from personal or home debt, structure each individual loan account to your needs, maximise tax benefits, etc, are readily available on the market (in Australia) and will make life easier for you and your financial advisor or accountant.
It is important to also remember that some of the costs associated with the refinance may also provide you with an additional tax benefit. Be a smart investor and refinance to the right loan for you.
6. Refinance for Financial Security
In today’s current volatile interest rate environment (in Australia), there is always the growing concern that with every rate rise, there is more chance that you may not be able to afford the repayments.
There is a solution. A refinance to a fixed rate loan gives you the security of knowing that if the variable rate is rising, that your repayment will remain the same. For peace of mind and the comfort of knowing that you can meet your repayments regardless of rates increasing, then a refinance to a fixed rate loan is for you.
I guess the question you need to ask yourself is “Should I refinance my loan?” Based on what you have just read, then quite simply the answer is yes.
Always do your research to establish what the best refinance option is for you. Remember, everyone’s needs are different, so you need to carefully consider your refinance options before contacting a refinance specialist.
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