Refinancing allows you to change your home loan to accommodate your changing circumstances. We face many changes in life from starting a new job to having a baby and losing one full time income. In order to keep up with repayments, it can be important to refinance a mortgage so that it meets your current needs. As well, consumers can find themselves dissatisfied with their current lender and seek a new one that offers a more flexible, better suited product.
Common reasons for seeking to refinance
- Fixed rate period is expiring and interest rates have come down
- To transition from a variable rate loan to a fixed rate with lower interest rates
- Better offer from new lender
- Dissatisfaction with current lender
- Change of circumstances e.g. new baby, lower income, higher income, improved credit score
- Adding a person to the mortgage, e.g. after marriage
- Removing one person from mortgage, e.g. after divorce
- Increase mortgage to cover expenses of major renovations or to purchase a new car
- Consolidating to include other debts such as credit or store cards
What to consider
Given that refinancing can potentially be costly and take time to finalise, it’s important to conduct your own research and also consult with a trusted advisor. Here are some vital considerations:
A dynamic market – The mortgage market is an ever-changing environment which is influenced by market fluctuations and competition between lenders. You may do your homework a couple of months in advance to feel out the market and see what’s available, however when it comes time to lock in a new mortgage, the offers may have changed entirely.
Why are you refinancing? – The answers to this question will dictate the kinds of products you look at. For instance, if your credit score has improved, then you may be able to secure a lower interest rate. Or, if your dual income status has changed after an injury or the birth of a baby, then you may be looking for a more flexible home loan. Make a list of your reasons for refinancing and also write a wish list of what your new circumstances require.
Will the costs outweigh the benefits? With refinancing comes a range of costs that may mean your overall advantage is diminished. There are break costs, establishment fees and bank charges, as well as the cost of your time to attend meetings with your financial advisor and/or lender.
Refinancing
The risks
One of the riskiest elements of refinancing your home loan is dealing with a disreputable financial advisor or lender. They may charge higher than normal fees, mismanage the refinancing agreement or incorrectly calculate the client’s affordability to pay off the new loan. When a disreputable lender arranges new financing that the borrower can’t afford, it’s known as ‘equity stripping’. While the lender pockets large chunks of money from the borrower by charging exorbitant interest rates, the borrower can lose their home entirely.
How to avoid disreputable lenders
Never sign blank documents or falsified documents. Read and understand everything you are being asked to sign.
If an offer sounds too good to be true, it most probably is.
Advertisements that offer to help, no matter how dire your financial position are a red flag that equity stripping is how they will ‘help’.
Any broker, advisor or lender who pressures you into signing up without giving you ample time to seriously consider the offer, should be avoided.
Refinancing can be a very smart way of saving money and customising your home loan to suit your current circumstances. Australian Mortgage Advice can perform a home loan health check for you at no charge to gauge whether refinancing is in fact the best solution for your situation. And if refinancing is not the most appropriate pathway for you, then we have other suggestions that we can discuss with you.