Refinancing is when your current loan is replaced with a new loan by the same or a different lender. The beauty of this transaction is that you can look for a better deal by comparing and choosing an up-to-date and competitive loan based on the features and rates the various banks now offer.
With ever changing interest rates, bank products, and lenders, it’s important to have a yearly home loan health check to ensure that you’re not ‘donating’ money to the banks.
There are a number of reasons why you might want to refinance, but the most significant is the savings that can be achieved through a more appropriate product. Interest on a home loan is calculated daily and charged monthly so it makes sense to try and keep the daily balance as low as you can. We like to think of interest as “rent on money” and minimising this expense is an important goal of any refinance strategy. Understanding the breakdown of a repayment is also important to understand. Minimum Principal and Interest repayments are set by the lender (and your choices) when the loan begins. The Principal component is the amount that repays the loan. It reduces the balance owing. The interest component is the amount you pay to the lender for the use of their money. When a loan commences, the principal component is usually small and the interest component is large and makes up the majority of the minimum repayment. This ratio changes in the borrower’s favour over time as the loan balance reduces.
Making additional repayments
This is one of the most important ways to reduce the interest bill as every dollar you pay into the loan reduces the balance owing to the lender. Refinancing creates a wonderful opportunity to review your debt reduction plans. Melbourne Mortgage Advice use sophisticated mortgage software to conduct calculations that can serve as a great motivator to the borrower for rapid debt reduction. For example, we can work on hypothetical additional repayments to see how much time you could save in paying off the loan. What about making weekly, fortnightly or monthly repayments? Which one will serve me the best? These are the types of questions we can answer and help tailor a mortgage to meet your specific situation and goals.
Free up home equity
Refinancing can also be a suitable time to free up some home equity so you can be prepared to fund personal needs/wants or investment opportunities should they arise. Depending on the lender and loan type, it’s possible to borrow additional funds and keep them in an Offset Account, saving you interest on the money until it is used. Debt consolidation can be another reason to consider a home loan refinance. So what is debt consolidation? It is a process by which a new home loan is established to not only cover the existing mortgage but an increased amount to pay out existing debts such as credit cards, personal loans, car loans and so on. There are pitfalls with debt consolidation and it pays to understand the finer detail. Consolidating debts into a new 30 year home loan will certainly drop the minimum repayment but the long term interest cost can be significant. Who wants to pay a credit card off over 30 years! We help our clients to understand the maths behind these situations so they can make informed decisions about loan terms, additional repayments and so on. A lower overall repayment might help the monthly budget, but this does come at a price. It can be a balancing act between short term benefit for long term pain! Get the facts, get written advice and make informed decisions.
Lighten the load
One of the main purposes of refinancing is to lighten the financial burden, however, that doesn’t mean that it’s not going to cost you. There are many fees involved when changing lenders, which can include lender discharge and application fees, legal fees, valuation fees, government fees and Lenders Mortgage Insurance. Understanding what costs are involved for your situation is crucial when working out the viability of a refinance. Put simply, you have to ensure that the costs involved are not higher than the potential savings to make the process worthwhile. We help you to understand the benefits of a potential refinance by completing a detailed Cost/Benefit Analysis. This professional advice is vital when making important decisions about the best path forward. If you understand the maths behind interest and fee calculations including short and long term consequences, you will be best placed to meet all of your refinancing objectives.
What other benefits of refinancing are there?
From time to time, lenders can offer incentives to win new business. We have recently seen special offers such as $1,500 (or more) cash rebates to reward borrowers for moving across. Terms and conditions always apply to these deals and the finer detail is always the key to calculating financial benefit. If the ongoing cost of the loan is too high, the benefit of the cash rebate would be eliminated. Having the opportunity to review the structure and risks of your home loan is always beneficial. Fixed Interest Rate loans can be an appropriate way to mitigate borrowing risk but understanding the pros and cons of Fixed and/or Split home loans is the key to making sensible decisions. A refinance situation presents the ideal time to complete a thorough review of your borrowing arrangements and implement a more suitable solution. Home loans are rarely (if ever!) suitable for 30 years so get in touch with a trusted mortgage advisor for personal advice.
Want to learn more about refinancing?
You may be interested to read through the Australian Government Moneysmart website for general information on refinancing and debt consolidation.
We are experts at helping our clients to explore the refinance options open to them. Sometimes it might be better that refinancing is not the best path to take whilst other times a complete restructure could be required. For an obligation free consultation to understand your options, get in touch with us today.