How Do I Know If I Should Refinance?

In today's market you are consistently bombarded with banks advertising campaigns enticing you to think about refinancing your current mortgage. So, what is involved with refinancing your mortgage and why should you refinance?

There are many reasons as to why you would look into refinancing your home loan. Refinancing is a big decision and there are usually some costs involved. Below are a few reasons as to why refinancing may be of benefit to you.

Is your existing interest rate too high?  Do you pay too many Bank Fees? One of the main reasons homeowners will decide to refinance is to "get a better deal"! This may mean taking advantage of lower interest rates or a loan without fees and charges. If you plan to be in your home for a period longer than 2 years the savings of reducing your monthly repayments will most likely justify the costs of refinancing, not to mention the hundreds of dollars saved in bank fees each and every year!

You want to pay your mortgage off faster? One of the safest ways to protect yourself from interest rate rises is to have no debt or as little debt as possible! This is why concentrating on paying your home loan off quickly is so important. If you are currently on a loan structure that isn't getting your income to work for YOU on your debt. Then refinancing onto a loan which does get your income working for you will end up saving you thousands of dollars and years off the term of your mortgage!

Do you want to switch your loan from fixed to variable so you have more flexibility? Fixed rate loans are usually inflexible. Unfortunately you are unable to get your income to suit when you are on a fixed rate loan. Variable loans have the freedom of being able to make extra repayments and use your redraw facility when applicable and therefore, give you more opportunity to actively reduce your debt.

Do you want to access equity available in your home? Through either increasing your loan facility limit or by increasing the loan amount you are able to pay for home improvements, renovations, a new car or any of life's other expenses without taking out a high interest personal loan or a credit card. By consolidating these outgoings to one loan you will minimize the interest payable and only have one low, simple repayment per month.

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How Refinancing Your Existing Credit Card Debt Will Save You Thousands of Dollars...

You and I are increasingly becoming a society dependent on credit and in particular credit cards. This is a direct result of clever marketing campaigns, softening lending policies and the convenience associated with credit cards.

Your parents and my parents all lived in a 'savings' based society, where if they didn't have the cash they didn't buy it! These days we are continually being exposed to direct marketing and easy access to credit. This has resulted in us transforming into a 'credit' based society, where if we don't have the money we just put it on credit and worry about paying for it later!

One of my clients, Daniel owned a house with a mortgage and after thinking about the option of refinancing his home loan, he decided to contact me to find out more about how refinancing his mortgage and credit card might be able to help him. I was able to show him how I could reduce his monthly repayments and show him how to pay less interest on what he owed on his credit cards.

Daniel was making a repayment each and every month of $400 to the credit card companies, with an interest rate on his credit cards of 16%. I did some calculations for him and found the following:

  • He would pay $9,484 in interest before his credit cards were clear
  • It would take 5 years and 9 months for Daniel to pay off the cards if he didn't make any more purchases with them
  • Daniel decided to continue making repayments of $400 and refinanced the credit card debt into his home loan. This now means he only pays $2,895 in interest and; it would will take him only 4 years and 4 months to pay off the debt

Every day I'm assisting clients like Daniel to get rid of their credit card debt. Due to the fact that every situation is unique, it's important that you allow me to help you assess your situation and in turn provide you with a FREE assessment.

Why Should You Refinance?

Refinancing your home loan is a process that you will go through at some stage of your home loan life cycle. The latest stats show that you will on average refinance your home loan every 3.9 years, and as a mortgage broker I can safely say that this time-frame is rapidly reducing.

A large proportion of the clients I see everyday are looking to refinance for a variety of reasons, whether it is because they wish to use the equity in their home to buy a new car, take that long overdue holiday or renovate their house. It makes a lot of financial sense to refinance your mortgage and borrow the money for these purposes at mortgage interest rates (7%), rather than paying personal loan (12%) or credit card (16%) interest rates. So why would you choose to refinance?

You may be able to take advantage of lower interest rates or No Bank Fees, which will in turn save you thousands of dollars. You may be able to switch from a variable rate to a fixed rate mortgage, giving you greater security in the future from potential rate increases.- You may also be able to increase the amount of your mortgage, to pay off other, higher interest rate liabilities such as credit card debt and personal loan debt. This will enable you to save money on interest charges. You may be wanting to purchase a new car, do some renovations or go on an overseas holiday.

Why would you avoid a refinance? A major downside to refinancing your mortgage is that the banks will reset your loan term back to the original 25 or 30 years. You are then back at the start of your home loan cycle again, where the majority of your monthly repayments are just covering the interest and not much at all is coming off of your principal. If you decide to borrow more than your existing mortgage, you need to be wary of your budget. If you default on your repayments you run the risk of losing your house.

If you do not calculate the costs involved with refinancing correctly, you could end up paying more in interest charges.Thoroughly review the contract of your existing loan, an early pay out could involve a penalty that would negate the benefits of refinancing. What will it cost me? Refinancing does carry some costs that you need to be made aware of. Most of these costs will be added to your home loan, so that you won't have to pay them upfront.

  • Break Costs - This is a fee that the banks will charge you to make changes to your existing loan contract. I've had some clients charged a few hundred dollars, and I've had other clients charged a few thousand dollars. It all depends on what interest rate your home loan is on, how long you have fixed it for and how long you have had the loan
  • Valuation Fee - This is the fee for a professional appraisal of the value of your house
  • Solicitor Fees - Solicitors are required to draw up your new mortgage documents, and they can charge up to $500 for this service
  • Mortgage Stamp Duty - This is payable on the increase to your existing loan amount or on the whole loan amount if you are changing lenders. I use a rule of thumb of approx. $400 per $100,000

Am I Eligible?

Applying for mortgage refinance is just like applying for another loan. There is a set criteria for acceptance. Every missed mortgage payment will count against you in the application, either resulting in a greater interest rate or a refused application.

Should I Choose Refinancing?

You will need to assess your current mortgage so that you can compare the changeover costs and savings to ascertain whether it will be of benefit to you. I understand this is a lot to take in, but we're here to help! For more personalised advice, get in touch with our Money Coaching team for your FREE consultation. We’ll come and see you, help you to analyse your situation, and give you proven strategies on how to reduce your debt and get on the path to financial freedom for good.

Cheers,

Scott.


Scott_HeadshotScott Parry, founder and CEO of Crown Lending, has been helping Australians manage their finances for close to a decade. Since launching his mortgage and debt management business from scratch in 2004, Parry has provided an alternative to the big banks that has consumer interests firmly at its core.
From a one-man office in Perth, Crown Lending has expanded to a national company that manages more than $250 million in home loans. This growth can be attributed to Parry’s radically simple approach to personal finance, addressing the number one financial concern for most Australians – debt reduction.

*Comparison rates are calculated on the basis of secured credit of $150,000 over a 25 year term. Please note this comparison rate is true only for the examples given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate.