It is practical for borrowers to refinance their mortgages now that interest rates are at their lowest. However, refinancing is not always about getting the lower rate — it is a strategy that can help you manage your finances better.
Here are some of the opportunities that you can unlock when you refinance your mortgages:
Debt consolidation is one of the things you can achieve when you refinance your mortgage. Refinancing is suitable for you if you are having trouble managing your financial commitments and debt. Debt consolidation is when you combine all of your debt so you have one large repayment, instead of several ones. This can help you both save on interest and manage your debt easier.
Take note that when you consolidate your debt, your repayments are likely to be significantly higher. This means that you should still work hard to pay off the loan as soon as possible.
When you consolidate your debt, you need to ensure that you will not resort back to old habits where you only make minimum repayments and then build up more debt on a new credit card.
One strategy that can help you is to ask your lender about having your other debt split from your mortgage. This way, you will still have the same interest rate, but you will have separate statements and repayments. Think of this as a reminder that on top of your mortgage, you also have personal debts that you need to pay off the soonest you can.
If you are planning to renovate your home or invest in a property for passive income, refinancing your mortgage is a viable option for you. You can refinance your mortgage to access the equity you built in your home over the years.
Be sure that you understand the factors that lender will consider when you apply for refinancing to release equity in your home. The biggest factor is the value of your property — if your property has appreciated over the years, then you can expect that you will be able to maximise this strategy. It is going to be an entirely different story if the value of your property depreciated. Most lenders will allow you to increase your loan to 90% of the value of the property but anything above 80% will have mortgage insurance implications. The more equity you have, the better chance you will have at being approved.
It is important to have a realistic idea about how your property is worth. You can speak with your local real estate agent and do your own research about recent past sales in the area. When doing your calculations, it is best to be conservative and work off the worst-case scenario so you can have a realistic idea about how much equity you will be able to access.
One rule of thumb that you should know as a borrower is to regularly check the market for a more competitive offer. No matter how long you have had your home loan for, you should consider comparing it with other loans on the market. Many lenders regularly update their products to keep them competitive, so you may actually find a better option with another lender.
If you think you could get a better deal, reach out to your current lender and other lenders about your situation. You can also negotiate with your current lender as they may be able to offer you a more competitive loan to keep you. But, if they are not willing to compromise, then it may be worth shopping around.
Move from bad credit to prime loan
If you currently have a bad credit home loan due to a bad repayment history or too much debt, you may find that you have a higher interest rate compared to other prime loans in the market.
You can move to a prime loan if you refinance to a lender and prove that your situation has already changed. If you can show your new lender that you are now in control of your finances, then you may be able to get a rate that is as competitive as the others currently in the market. Make sure you speak with your lender to see whether you would be eligible for a standard loan and if you’re not, find out what changes you need to make in order to be.
This is an updated version of a guide originally published in April 2014.