In this article:
Refinancing is nothing but replacing your current mortgage with another one. You could either opt for a different plan with your current lender or move to a new lender altogether. There are multiple reasons to do this. The tenure of a mortgage typically spans a few decades and during a period so long your circumstances are likely to change a lot. To begin with, you could be earning a lot more and can, therefore, close your mortgage sooner or perhaps there’s been a massive rate cut that your lender isn’t passing on to you completely. Here’s a peek into the possible benefits of refinancing.
Lower interest rate
Refinancing is usually about getting yourself a better deal. If you feel that your current mortgage contract isn’t in line with what the market is offering, it is worth your time to find yourself a refinancing option that lets you make payments for lower interest rates. Even a 1% rate difference could make a huge difference. For a 4.9 % interest rate on an AUD 500,000 loan, a decline of 1% in the interest rate could lead to savings of AUD 106,305.
Contributing more to your mortgage could result in quicker closure of your loan, which in turn could mean thousands of dollars in savings. There are two ways this could happen. The first is when you pay more each month for the same interest rate. The second is when the interest rate declines, and you repay a larger proportion of the total loan amount with the same monthly payment. Either way, you can work towards quicker homeownership with refinancing. Let’s take the example of an AUD 500,000 loan with an interest rate of 4.5%. If you raised your monthly payment from 2,533 to 2,779 (which is an increase of just 8 dollars per day) you could shave of 5 years on your loan and rake in savings of AUD 78,285.
Switching between flexible and fixed rates
Repayment discipline changes with time. Borrowers who initially managed variable mortgage rates with ease may gradually find it hard to maintain financial discipline with personal circumstances like birth of children, illness, loss of livelihood, passing away of a breadwinning family member or change of profession. Switching to a fixed rate in such situations could help with financial discipline. On the other hand, borrowers with good financial discipline could benefit substantially from falling interest rates and should opt for a mortgage with a variable rate. Refinancing gives you the flexibility to make this switch.
Leveraging Home Equity
Equity is the value of the property minus the money you as the borrower owe the lender. If the current value of the property is AUD 500,0000 and you owe the bank AUD 400,000 then your equity is AUD 100,000. Refinancing gives you the option of using this equity as security to borrow more for investment or other personal needs.
If your current mortgage plan doesn’t offer you the feature of an offset account, then it could be wise to consider moving to a lender that does. An offset account is an account that’s linked to your mortgage and allows you to pay lower interest thereby improving your chances of closing your loan sooner. Here’s how it works. Let’s assume you owe the bank AUD 500,000 and have AUD 25,000 in your offset account. So, the bank will now calculate interest for your repayment on AUD 475,000 (due to AUD 25,000 in your offset account) instead of AUD 500,000. If you feel this isn’t much, you would be surprised to know that this could knock off a few years from your loan tenure.
For borrowers who end up with a lot of non-mortgage debt, handling and keeping track of multiple loans is not only hard but can easily snowball into a financial commitment that can get overwhelming to manage. Refinancing could help you bundle multiple forms of existing debt into your home loan. The key takeaways of doing this are
- Replacement of multiple repayments with one consolidated payment for easier management
- Potentially lower interest rates as home loan rates are lower than other rates like credit card loans
- Clear timeline of when you’ll be debt-free
Changing Mortgage Applicants
There may be several reasons to change the applicants of the mortgage. Your partner could opt to stop working. Separation or partner demise are other reasons. Refinancing can make changing applicants on your mortgage straight forward and simple.
In the end…
Refinancing allows you to make changes to your existing mortgage arrangements in accordance with evolving personal circumstances and improve your finances. The best way to go about this is to reach out to an experienced mortgage broker who could recommend solutions as your specific needs.
Call us on 1800 754 758 or email us at [email protected] for a face to face interaction with a refinancing expert.