Refinancing your mortgage is a big call, and one that needs to be considered carefully. While it may seem like an ideal prospect- whether to take advantage of lower interest rates or access extra cash- there are fees that come with the process, as well as the prospect of juggling with what is essentially your largest asset. Here are some of the ins and outs of refinancing your mortgage.
When refinancing makes sense
Lower Interest Rate
You might want to refinance to take advantage of a lower interest rate. In a market such as this one currently, interest rates might be significantly lower than they were when you initially got your mortgage. A lower interest rate has significant financial benefits, especially over the course of your mortgage.
Lower Repayment Rate
Not recommended unless you have planned for this decision. Extending the length of your mortgage- meaning that your repayment rate is lower- will mean your mortgage will garner more interest over the years, making it necessary for you to pay more over your asset’s capital. In saying that, if you need breathing space or are struggling, this is an option to discuss with your financial advisor. Especially if, once you’re back on top, you can make repaying your mortgage the number one priority.
Less Years, Less Interest
If you’ve managed to get ahead, then quickly paying off your mortgage is a great idea for many personal finance experts. While some suggest using the capital for other investments, others point to the advantages of less interest payments- saving you money- and the financial leverage of owning your own home.
Cash Out Of Equity
Your equity is the gap between how much you owe on your home and its value. Basically, it’s your profit margin. And, with the drop in house prices, it may not be what it used to be. Be sure to check what your equity is, without a decent margin, you’re unlikely to qualify for refinancing.
When you should reconsider refinancing
People refinance for many reasons. Sometimes it’s to take advantage of a cheaper interest rate (and, let’s be honest, there’s enough of those floating around at the moment). Sometimes it’s to take advantage of a move to variable interest rates, or to access the equity in your home for renovations or holidays. Often it functions as a means to consolidate debts into one debt, which can be repayed at a lower interest. These are often reasons to refinance once, but some writers would suggest refinancing once a decade in order to solidify your finances in other areas.
- When your mortgage penalises early payments
- When you’re not sure whether you’ll still be in the house in the next couple of years
- When the fees form too high an amount when compared to the refinancing amount, or the potential opportunities offered by refinancing.
What are the costs of refinancing?
As with any financial transaction, especially a loan application, there are several additional costs to be considered when refinancing. The application fees, early settlement fees and discharge fees on the existing loan, stamp duty and the possibility of a valuation fee for your property. Just because there are additional costs doesn’t mean you should instantly write off refinancing as a possibility, merely that they need to be taken into account when considering it as a financial move.
Other fees include:
- An application fee
- Appraisal fee, where the lender assesses the value of your property.
- Inspection- termites, structural assessment.
- Solicitor or conveyancing costs
- Insurance
How can you save money when refinancing a mortgage?
Like all big financial decisions, refinancing requires a lot of research. Probably the first two stops would be your current lender, to discuss what they can offer, and your financial advisor to discuss the positive and negative aspects of the decision.
Then it’s worthwhile asking for quotes from other lenders- always being wary of those that promise the world- and work out what option would work best for you. Beyond the offered interest rate, look at loan features, whether you’ll be able to pay it back quickly without penalty, whether you should look to fix the mortgage or leave it at the variable rate. With that information you’ll be able to make a sustainable financial decision about refinancing.
Tips to consider before refinancing
A few tips and tricks to consider as you start to consider refinancing a mortgage.
Make some preliminary calculations
Before you shop around, get a clear understanding of your loan’s ‘exit’ fee, ongoing costs, features and interest rate. You want to compare the overall costs of switching loans versus the overall savings.
Know what you really need from a home loan
A low interest rate is important but it’s not everything. Decide on the loan features you feel will help you achieve your goals sooner. Keep in mind some might have fees attached, depending on the product. You may be able to save money by dropping features you don’t use.
Research the market for ‘cheaper’, better suited home loans
Do this by trawling loan comparison websites, calling lenders or having an experienced mortgage broker research for you. This will give you a solid idea of how your current loan stacks up in the market place.
Negotiate with your lender for a better deal
Now you have a good idea of your loan’s value see if your lender is eager to retain your business by sweetening their offering.
Consider the pros and cons
If choosing a new lender and loan product, be sure to weigh up your pros, cons, needs and wants such as these: loan cost (upfront, ongoing, exit), loan features (interest rate and type, redraw, offset, portability, term), lender service (loan access, customer query channel, approval turnaround time), lender reputation and your lifestyle and objectives.
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