Mortgage Refinance refers to the process of repaying you existing mortgage and replacing it with a new mortgage. There are numerous reasons why you may choose to refinance from your existing lender. There are also a number of pitfalls to avoid and considerations to be mindful of when considering Mortgage Refinance.
Looking for a Cheaper Mortgage
One of the most common reasons why people decide to refinance is to lower the interest rate on their existing loan. The Australian home loan market is very competitive and the range of available interest rates is quite narrow. Certainly, it is always possible to get a better interest rate. However, if it looks too good to be true it probably is. Currently most Mortgage rates range between 6.25% and 7.25%. If anyone is offering a loan at a rate significantly lower than 6.25% - warning bells should be going off. You do need to make sure that the rate you are looking at is the Comparison rate not the Raw rate which does not include all the fees and charges levied with the loan. This can be a trap for young players. Not all that Glistens is Gold, and you may find that the lower rate comes with and inflexible loan which does not allow for :
- early or extra repayments;
- loan splits;
- portability etc.
While on face value one loan may look to be cheaper than another – on a closer look it may not be so.
In my experience the biggest winners from a mortgage refinance are applicants who at the time of obtaining their original mortgage had credit history problems and as a consequence their mortgage interest rate was higher than that on a standard, clean credit loan. After a period of time such applicants can benefit from significant savings through a mortgage refinance. Providing they maintain timely mortgage repayments, after a period of time they can be eligible for a clean credit mortgage with a lower interest rate.
Access To Home Equity
Homeowners often access the equity in their homes to cover major expenses, such as the costs of home renovation, new car, college education etc. While it is also possible to take out a personal loan to pay for these, the repayment term as well as the lower interest rate can make borrowing money out of your mortgage far more attractive.
The increase in the real estate market values over the recent years has provided Aussies with the opportunity to borrow money against their residences to generate cash for the things they need. Financial institutions are also making it easier for people with equity in their homes to borrow money. Some lenders will lend you money out of the equity in your home without needing to provide any evidence of your income or employment. These loans are known as “Low Doc”. If you are looking for extra money and own a home, you may want to consider one of the two options, either refinance your existing mortgage or take an equity line of credit against your home. Either option can make it possible to access funds for any purpose at home loan rates.
Debt Consolidation
Many homeowners refinance in order to consolidate their other debts. At face value, replacing high-interest debt with a low-interest mortgage is a good idea. This can make debt repayment more affordable by reducing monthly repayments overall and assisting prudent applicants in gaining financial independence sooner. Unfortunately, refinancing does not automatically bring with it renewed financial prudence. In reality, a large percentage of people who have a history of generating high-interest debt on credit cards, cars and other purchases will simply do it again after the mortgage refinancing gives them the available credit to do so.
Therein lies a danger. Persons who are not able to control their expenses may revert to old habits after gaining access to more funds out of their home. This may eventually result in loss of equity in the house, additional years of increased interest payments on the new mortgage and the return of high-interest debt once the credit cards are maxed out again. In other words - endless perpetuation of the cycle of debt.
Nonetheless – responsible home owners will find that Consolidation of their debts into their mortgage can make them debt free sooner and even assist in cleaning their credit history.
Should You Refinance?
Refinancing can be a great financial move if it reduces your mortgage payment, shortens the term of your loan or helps you build equity more quickly. When used carefully, it can also be a valuable tool in getting your debt under control.
Before deciding to proceed with a Mortgage Refinance you should consider whether the costs of the refinance are lower than the anticipated benefits. If you are intending to retain the property for some time into the future – a refinance may be a great idea. However if your intention is to shortly sell the property – then I would not recommend a refinance.
It can take some time to recoup that cost of the refinance with the savings generated by a lower interest rate or shorter term. So, if you are not planning to stay in the home for more than a few years, the cost of refinancing may negate any of the potential savings.
If in doubt – please speak to a financial adviser or a reputable mortgage broker.
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