More and more homeowners in Australia are looking to refinance their mortgage to switch to more competitive rates, reduce debt, or increase equity. If you’re one of those who are planning to refinance your home loans to get better deals, read on. In this blog, we talk about refinancing and if it’s really worth doing so.

What exactly is refinancing?

Simply put, refinancing is the process of changing your current loan for a new loan, hopefully with a lower interest or a more competitive rate. As mentioned earlier, refinancing is commonly practiced on home loans or mortgages to take advantage of changes in interest rates.

Should you refinance your mortgage?

Let's go over the benefits of refinancing your mortgage before you make the decision to do so.

1. Refinancing can help you take advantage of lower interest rates

The primary motivation for homeowners to refinance is to get a cheaper interest rate and thereby save money. Mortgage interest rates fluctuate over time, and refinancing allows you to finish your home plan at a cheaper cost. This aids in the reduction of the mortgage term.

2. You can get a mortgage with a shorter duration when you refinance

Changes in interest rate are not the only reason to refinance. Refinancing also works if you want to get a mortgage with a shorter term. Let’s say you still have 15 years left on your 20-year mortgage, you might want to consider refinancing to a 10-year plan if your financial situation allows it. Interest payments will be significantly reduced if the mortgage term is shortened. However, depending on your plan, this may result in a little or large increase in your monthly payment.

3. Refinancing allows you to modify your mortgage plans

Refinancing allows you to switch from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage (FRM) or vice versa. An adjustable-rate mortgage (ARM) is a loan with a variable interest rate that changes over time. At the outset, an ARM has a fixed interest rate that fluctuates every year or month. ARM is most-suited for individuals who can pay-off within the specified time. A fixed-rate mortgage is a form of house loan that has a fixed interest rate for the duration of the loan. FRM is a budgeting approach that protects you from unexpected increases in monthly payments due to changes in interest rate.

Consider these factors before refinancing:

1. Refinancing costs

Before you decide to refinance your mortgage, you should familiarize yourself with the costs associated with a new loan. The cost of refinancing usually ranges from 3% to 6% of the loan's principal. The cost depends on variables such as the amount of your loan, your mortgage term and type, home equity, and other associated fees like application, origination and credit report charges. You should also consider the fees for home evaluation and inspections.

After tallying the cost, consider whether refinancing is beneficial to you or not. Will you be able to save more money as a result? How long do you plan to stay in your current property? Because refinancing will earn you a better interest rate than your first mortgage plan, the length of tenure should be able to boost your savings.

2. Plan type for refinancing

You can get rid of your previous mortgage by refinancing. It allows you to choose which form of mortgage plan best suits your current situation, lifestyle and needs, and as a result, save money. Select the most cost-effective financial strategy and take advantage of current low mortgage rates.

3. Current interest rate

Refinancing is best done when mortgage rates are down, especially when you can reduce your interest rate by 2%. Although some consider even a drop of 1% in interest rates as huge savings and therefore, an enough metric to refinance. Remember to lock on a fixed interest rate before the numbers increase again to enjoy low interest rates. As time consuming as it seems, keep yourself updated on the news and take the opportunity once interest rates drop. Alternatively, you can always consult the experts whenever you need them.

4. Your credit score and debt servicing ratio

The approval of a new loan is heavily influenced by your credit score and debt-servicing ratio. Credit scores are used by lenders to assess your financial health and determine whether you are a responsible creditor. You'll get the best interest rate if you have a good credit rating. Limit credit charges to less than 30% of your credit limit to improve your credit score. Another suggestion is to keep track of your dues and pay them on time.

Final word

Any decision involving your finances is a big decision. Remember to do refinancing only if the benefits outweigh all the costs depending on your current financial capabilities. And as with other things, talk to an expert to help you make the best decision.

Should you need help, don’t hesitate to contact us. Our experienced brokers will work with you to understand your refinancing goals and find a lender that suits your needs.

Contact us through the following channels:

• Phone: (02) 9630 3142
• Email: [email protected]