Is refinancing always a good idea? Sarah Megginson, managing editor of YourMortgage.com.au, sits down with Classic Finance founder, Nancy Youssef about the benefits and pitfalls of refinancing your mortgage.
Refinancing is the process of replacing an existing loan with a new one, either to reduce monthly payments, lower interest rate, or tap into home equity.
Many are surprised to learn that in some instances, refinancing won’t actually lower your repayments – especially if you shorten your loan term.
Lets say you have a mortgage with 27 years remaining on the term, and you decide to refinance to a lower interest rate. However, due to your age, the bank requires you to take on a 25-year loan term. In this instance, your repayments could actually increase.
Youssef adds that refinancing may not be a good idea, if you have no apparent savings.
“Sometimes people get swayed by the interest rate thinking, ‘Oh, I might save 0.25%, but you’ve also got to look at all the costs involved in refinancing,” she says.
“If you are currently in a fixed straight loan and you look at moving, there could be some hefty break costs. Check with your lender before refinancing to make sure that there are no other costs or hidden things you weren’t budgeting for.”
When is the right time to refinance?
If you plan to refinance your mortgage, assessing your financial capacity and factor in interest rates are the first steps to consider.
It’s always a good idea to consult with an experienced mortgage broker to help you work the best time to refinance, in regards to your personal situation.
For instance, if you have just recently changed jobs, then you may need to wait until you have been employed for 3-6 months before a bank or lender will consider your loan application. Or, they may be lenders in the market who are willing to extend you finance even with a recent employment change.
This is where your broker can be worth their weight in gold, as they can guide you towards the right lender and loan product.
Refinancing your mortgage can be a valuable tool for bringing your debt under control. Learning the basics of home refinancing and how it contributes to your goals will help you decide which mortgage option makes the most sense for you.