If you have purchased a property, chances are you have a mortgage and understand that there is an array of options out there. Finding the right loan for you, getting approved and finally settling into your regular payments can be quite a process. However, as time passes, circumstances change – you may get a promotion, have children or take on more debt. The value of your home could have increased, and no doubt interest rates are different now to when you first purchased your property. With all of these changes, the mortgage that was right for you years ago may not be ideal for you today.
What is the process?
The first step when considering to refinance your mortgage is to do as much research as you can. It’s essential to have an understanding of the pros and cons associated with refinancing your home in relation to your individual situation. Advice from your financial advisor or broker is key to ensure you make the right decision for you.
If you have found a home loan that will be of greater benefit to you than your current one, the next step is to apply for it. This will involve a similar process to when you first bought your home, including the consolidation of supporting documents such as identification, bank statements and pay slips. Once the application has been submitted, the lender may request for your property to be revalued. If the application is accepted, your lender will close your old mortgage account and use your new loan to pay off your old one. Then you will begin your new repayments.
A good advisor will be able to walk you through this entire process to ensure you thoroughly understand how refinancing will affect you and what it will cost you in both the long and short-term.
Why it could make sense to refinance
If you find a refinancing option that suits you and your situation, it could allow you to pay off your loan faster, use equity to invest in additional properties, reduce monthly payments or secure a more competitive interest rate. You could add more features to your mortgage, such as flexible repayments or an offset account, or even consolidate current debts. There are a number of reasons when refinancing your property could make sense, including:
To secure a lower interest rate deal that has become available or change to a fixed rate at an appropriate time;
A significant change has occurred in either your personal or financial situation;
To consolidate debts such as credit cards or car loans; or
Your property value has increased, and you would like to use your equity to invest in something such as another property or renovations.
Why it may not make sense to refinance
While there can be many advantages to refinancing your mortgage, it’s important to be aware of the disadvantages. Remember the paperwork and process you undertook when you first applied for a home loan? You will be required to go through that all over again. It could also be costly with charges such as legal, break and exit fees, which may not make it worthwhile, and although some changes are enticing because they’re rewarding in the short-term, they may not benefit you in the long-term. Refinancing your home loan is not always an ideal option for a variety of reasons, including if:
The value of your property has decreased;
You may only own the property for a short period;
Your reliable source of income is unstable or has ceased; or
Your credit history has declined, which could result in a poor rate.
What to be aware of when refinancing
While you may want to refinance your home loan to improve your financial situation, the process can come at a cost. Needless to say, it’s imperative to carefully calculate these costs to ensure they do not outweigh what you could potentially save. Costs associated with refinancing could include:
Loan application fee – You may be charged when you apply for a new home loan.
Valuation fee – You might need to pay for a professional property valuer to determine the present value of your property.
Exit, break or settlement fees – If you decide to pay your current loan off earlier than anticipated or agreed upon with your current lender, you may get hit with some extra expenses.
Legal fees – You may want to hire a solicitor to ensure everything is covered and correct when transferring your mortgage from one lender to another.
Government fees – Registering and transferring your property may incur fees from the government, such as stamp duty or a mortgage registration fee.
Mortgage fees – Your new mortgage could charge account-keeping, annual or redrawing fees.
Lenders Mortgage Insurance (LMI) – If you don’t hold at least 20% equity, you may be charged LMI when refinancing.
What are the alternatives?
Refinancing may not be the best option for everyone, so it could be worth considering other options. Discuss alternatives with your current lender or financial advisor. Your broker could work hard to keep you as a client, and depending on your specific situation, negotiating a lower interest rate or fixed repayments for a period could be a good solution. Explore the benefits of interest-only repayments or extending the term of your current home loan with your lender. These options may be of benefit but be sure to consider the change carefully. Do your research into what deals are available, the cost of converting and assess the real reason you want to refinance.
Choosing to change your mortgage will always come down to your financial goals and personal circumstances. To learn more about home loan refinancing or to determine if you are eligible, talk your broker or financial advisor today.