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 your existing loan with a new, more competitive one; done either to reduce monthly payments, lower the interest rate, or tap into your home’s equity to pursue other life endeavours, whether they are of the lifestyle, travel or property investing kind.
However, many borrowers are surprised to learn that in some instances, refinancing won’t actually lower your repayments and give you the real cash savings that you seek – especially if you shorten your loan term.
Let’s 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 individual monthly repayments could actually experience an increase because your total loan balance is then more tightly condensed across a shorter length of time.
Founder of Classic Finance, Nancy Youssef, says that refinancing may also 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 explains.
“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 factoring 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 out the best time to refinance. In addition to this, they are exposed to a wider panel of lenders and can also ensure that the new home loan product that you refinance to will suit your long-term financial capacity, as well as your property goals.
When the ‘right time’ comes into question, 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.
Your broker can be worth their weight in gold, as they can guide you towards the right lender and loan product. This especially resonates under the current economic environment, as steered forth by COVID-19 and its upheaval on even the fittest of businesses; which has resulted in many households losing their main source of income overnight or having their employment throw out of balance.
While leading lenders have issued a number of necessary relief packages in order to assist borrowers during such widespread financial hardship, home loan applicants have been met with a number of restrictions to prevent the likelihood of them having to default on their new home loan.
This could mean that refinancing your current home loan may not be accessible to you at this time, but a little further down the track once the climate stabilises (and more of the ‘norm’ that we all know re-establishes itself).
It’s also worth noting that 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 to decide which mortgage option makes the most sense for you.