Whenever it makes financial sense to do so.
Heard about mortgage refinancing? In the past, most people who took out a mortgage doggedly continued with it until they had paid it off. These days, people refinance their mortgages much more frequently. The average duration of a home loan in Australia now is just 4-5 years. Over that time, you will have reduced your loan balance and your property value will hopefully have increased that time. This puts you in a strong position to shop around with other lenders and look for a better interest rate or a more flexible product.
Here we look at some of the reasons people in Australia refinance their home loans.
Mortgage refinancing reasons: lower rate
The most common reason for people to refinance their mortgage is to get a better deal. It could be because the current interest rates available is lower than what you are paying. There could be a temporary special deal for refinancing offering a cash bonus that will cover your loan switching fee. If you had a low doc mortgage but now have sufficient income evidence, you may qualify for a standard home loan at a sharper interest rate. But be careful you don’t become interest rate-fixated. When you refinance your home loan, you need to consider fees and charges as well as the interest rate. You often have to pay charges for exiting your current home loan, plus charges for taking out the new mortgage. You need to be sure that in refinancing your home loan that you’ll be better off in the long run after taking into account all costs. Only go ahead with refinancing if the newer deals that you are contracted into are more cost-effective after considering all the hidden switching costs.
Mortgage refinancing reasons: more flexibility
Many people only discover the full details about their mortgage when it’s too late. They try to do something and get told by their lender that either they can’t do it, or they will incur a hefty charge if they do. An example is a redraw facility – the ability to pay extra money into a mortgage and then redraw it later. This feature is not possible with a basic home loan, so many people refinance their mortgage to give themselves this sort of increased flexibility.
Mortgage refinancing reasons: renovation
If you carry out renovations, it often makes sense to refinance your mortgage and take out a construction loan so you only pay interest as the building progress. Once construction is over, it might make sense to refinance your home loan again so that you consolidate the total amount you owe into a loan that minimizes your interest bill, while giving you a degree of liquidity.
Mortgage refinancing reasons: home equity
Over recent years in the property market houses have appreciated at a significant rate. e.g. a home you bought for $500,000 five years ago, might now be worth $700,000. Refinancing your mortgage with a home equity loan might let you tap into that extra $200,000 equity.
Mortgage refinancing reasons: defaulting
Some people find they have borrowed more than they can comfortably repay, and they’re in danger of defaulting. There’s no shame in that. But don’t suffer in silence. Temporarily switching to interest-only from principal and interest repayments may be another option for some borrowers, especially those taking parental leave. Also, you might want to consider extending your loan term, which can also reduce your mortgage repayments. Keep in mind that both of these options should only be considered as short-term solutions because they can make your mortgage more expensive over the long term.
A good finance broker can save you time and money, and give you peace of mind. But, remember, only work with finance brokers who are members of MFAA - they are the Essentials of Borrowing.
Jenice Lee at Finance Star is MFAA approved finance broker and is not your average mortgage broker.
Contact us if you want to find out more about how we can help with your finance options.
This article provides general information only and has been prepared without taking into account your objectives, financial situation, or needs. We recommend that you consider whether it is appropriate for your circumstances and your full financial situation will need to be reviewed prior to acceptance of any offer or product. It does not constitute legal, tax, or financial advice and you should always seek professional advice in relation to your individual circumstances.
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