If you want to access a cheaper interest rate or you wish to move to a more flexible mortgage product, then refinancing your loan makes sense. But there are plenty of things you need to you consider before you make the leap, as making a mistake can be costly and time consuming to fix.
There are many reasons why people refinance their loans, so if you’re thinking of refinancing, the first thing you need to do is figure out your intentions.
“Refinancing provides an opportunity to fix some of the things that are wrong with your existing loan, so you are better placed to reach your goals,” explains finance expert Michael Lee.
Therefore, even though “it sounds pretty obvious”, he recommends that you clearly identifying what you want to achieve from the outset.
Some common reasons for refinancing include:
To increase flexibility
You may want to tap into more funding, have easier access to your equity, or take advantage of better savings strategies through an offset account. It’s a good idea to have a list of flexibility “must haves” before you start comparing different loans, so you can be sure you’re comparing apples with apples.
To reduce flexibility
“The classic example of this is to switch from a line of credit, which requires good financial discipline to work effectively, to a principal and interest repayment with a 100% offset account,” Lee says.
To increase stability
Since October last year the RBA has delivered six rate hikes, so it’s no wonder that many mortgage holders are nervous about the threat of further interest rate increases. “If you are getting worried, make sure you shop around for the best deal – and understand that if rates fall once you’ve locked into a fixed loan, the price of getting out can be hideously high,” Lee says.
To save money
“This is perhaps the most common reason why people refinance,” Lee says. You could save money on your loan by refinancing to a mortgage with a lower interest rate or lower ongoing fees, or you might reduce your repayments by reamortising your loan term. While this second option doesn’t necessarily save you money, it will have the effect of reducing your monthly repayments.
Once you’ve analysed your reasons for refinancing, you’ll be in a better place to decide whether refinancing is actually the right move.
“Refinancing is all about having your mortgage work for you, rather than against you,” Lee adds.
However, there can be hefty fees and charges involved in a complete refinance, including valuation fees, deferred establishment fees and even Lender’s Mortgage Insurance, so the best option for you may be to simply stay put.
You may find that a discussion with current lender might provide you with some solutions that don’t involve a full refinance: for example, with most banks, you can switch from a variable rate loan to a fixed rate loan by paying a “switch fee” of around $2-300.
If you’re unsure what to do with your loan or you need some guidance, speak to your mortgage broker or another trusted financial advisor for advice.