Should you Refinance?

If you’ve had your home loan for a number of years, it’s likely that your needs have changed. You may have a different financial situation, but your current home loan may not have the range of flexible features and add-ons that are now available on the market.

In the past, most people who took out a mortgage continued with it until they had paid it off. These days, people refinance their mortgage much more frequently. The average duration of a home loan in Australia now is just 4-5 years.

Refinancing involves paying out your current loan with a new one. It may shorten your loan terms and reduce repayments on your loan, so you can afford to make extra mortgage repayments and own your home sooner.

Here we look at some of the reasons people in Australia refinance their home loan:

1. Lower Rate

The most common reason for people to refinance their mortgage is to get a better deal. But be careful you don’t become fixated on interest rate.

When you refinance your home loan, you need to consider fees and charges as well as the interest rate. 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.

2. Home Equity

Over recent years in the property market houses have appreciated at a significant rate. For example a home you bought for $300,000 five years ago, might now be worth $500,000.

Refinancing your mortgage with home equity might let you tap into that extra $200,000 equity to cover major costs such as school fees or a family holiday. It can also allow you to renovate your property which could in turn add to its value.

3. 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 building progresses.

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 minimises your interest bill, while giving you a degree of liquidity.

4. 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.

5. Mortgage Stress

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. If you’re having trouble making your mortgage repayments, talk to your broker about refinancing your home loan to make it more manageable.

6. Things to Consider

When comparing home loans, you should take into account any upfront and ongoing costs associated with exiting your current loan and switching to the new home loan.

Although exit fees were abolished in Australia in July 2011, fixed agreements made prior to this date may still incur an exit fee.

Other fees to take into consideration include, but are not limited to, valuation, settlement and establishment fees, as well as paying the non-transferrable lender’s mortgage insurance again if you are borrowing more than 80 percent.

Should you refinance? Speak with us to discuss your options and see what’s possible.

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