Refinancing. It looms above every home loan. Are you missing a trick if you don’t do it? How does it work? Marc Barlows of Mortgage Broker Melbourne discusses the questions to ask before making the decision, and how the process works.
What exactly is refinancing?
When you refinance, you’re basically taking out a brand new loan in order to pay off your existing mortgage. This can free up funds for a renovation, another investment, or get you a better deal and – over time – save you money. The trick is figuring out whether it’s the right thing for you to do.
Do you want to access funds for a renovation or investment property?
A common reason for mortgage holders to refinance is so that they can access equity in their existing loan in order to make home improvements or buy an investment property. If you’ve paid off some of your loan and your property has gone up in value, you may be able to borrow more.
Other ways to access equity are to redraw any extra payments you might have made or increase the amount on your existing mortgage. A mortgage broker can help you work out the best option for you, and how much you might be able to borrow.
Do you want to pay less interest?
Savvy borrowers keep an eye on the market. The home loan market is highly competitive, with big differences in interest rates. Mortgage-holders often choose to refinance to take advantage of a lower interest rate from another lender. Over time, even a small difference in the rate could save you thousands of dollars, and ultimately help you pay off your home loan faster.
While that sounds good, it can be tricky terrain to navigate. Not all home loan products are created equal, and mortgages with lower rates often lack the benefits of higher-rate products, and may not have all the features of your existing loan.
A mortgage broker can work out your specific loan requirements, and scan the market for better interest rates as well as finding products with the features and benefits that you want.
Sometimes, getting a lower interest rate can be done without the hassle of refinancing; in many cases our team have been able to negotiate better deals with our clients’ existing lenders just by asking!
Have your circumstances changed?
You might want to refinance if you’ve had a major life change – for example, a new employment situation resulting in a drop in income, or a change in marital status.
Taking out a new mortgage may let you consolidate your personal loans and credit cards into one facility, so your monthly payments are lower and you save on interest.
Do you want to change your loan type?
Switching from a variable to a fixed loan with your existing lender may allow you to improve your interest rate without changing lenders. Maybe you want to change to a split loan, with part variable and part fixed rates. In either case, you may need to refinance in order to change your loan, depending on the type of mortgage you have.
You’ve decided to refinance. What next?
Once you’ve decided that refinancing is the right move for you, the process is fairly simple.
- You need to submit your application, which will involve providing identification, proof of income and a list of assets and liabilities (less is needed if you’re staying with your existing lender).
- Lenders will often require you to get a valuation of your property to determine how much you can borrow, which generally requires a property inspection by a licensed valuer.
- Once the lender is satisfied, you’ll receive approval with a copy of the loan contract to review, sign and return. When you’ve done that, your funds will be cleared.
- Your new lender (if you’re changing lenders) will arrange settlement of your existing loan and establishment of your new loan.
- Your decision to refinance or not will come down to your personal circumstances and financial situation. Before taking any action, get in touch with a certified mortgage broker who can help you choose the best loan solution for your needs.
About the author:
Marc Barlow has been mortgage broking for over 10 years, after prior employment with retail banks in Australia and the UK. He is currently a mortgage broker at Mortgage Broker Melbourne based on Collins Street in the CBD.
Disclaimer: While due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Mortgage.