BY MARIA PAPA – As a homeowner 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. Before you initiate an application to refinance, your broker will need to assess your needs and objectives as well as your current financial situation.
So how will you know that refinancing is the right option for you?
Are you looking at paying 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.
- How much interest are you paying? A .20% drop in interest rate will not make too much of a dent on your repayment. A drop of .50% on a $500,000 loan will save you $2,500 a year in interest.
- What is your current loan structure? If you are on a fixed rate and the refinance will involve payment of break cost of more than $1,000, best if you wait until the fixed rate expires.
- What is your current financial situation? Your existing debts, number of kids and your current employment status will affect your borrowing capacity. You may not be able to afford the loan you were able to get in the past because your personal and financial situation has changed.
- What is your property worth? Has it gone up in value? If you took out the loan a couple of years back, chances are your home’s market value has not gone up. If the loan was taken out with only a 5% deposit, you may have to pay loan mortgage insurance all over again. If switching your loan means you will need to pay LMI again, it may not be worth refinancing.
In some cases, getting a lower interest rate from your current lender can be achieved without refinancing. If you do decide to go down the refinancing path, working with a broker rather than going straight to a lender has advantages. Broker’s generally have access to loan options from a range of different lenders (on average 34 lenders), and if there’s a better opportunity and cashbacks available 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.
Your broker 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.
This article is for general information only and should not be considered personal financial advice. Before making a financial decision, you should seek independent advice from a mortgage broker, financial planner or an accountant.
Maria Papa is a senior finance expert specialising in home loans, investment loans, self-employed loans, Lo Doc loans, car loans, personal loans and loan protection. She has offices in Sydney and Melbourne. If you have questions, you can call Maria at 0430 144 008 or email her at mpapa@maverickfinance.com.au