Refinancing your loan/s
When would I refinance my Mortgage?
Whenever it makes financial sense to do so.
Heard about Mortgage Refinancing? In the past, most people who took out a Mortgage doggedly 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. Here we look at some of the reasons people in Australia refinance their Home Loan.
Mortgage Refinancing Reasons: 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 interest rate-fixated. When you refinance your Home Loan, you need to consider fees and charges as well as the interest rate. You often have to pay charges for exiting your current home loan, plus charges for taking out the new mortgage. 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.
Mortgage Refinancing Reasons: 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.
Mortgage Refinancing Reasons: 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.
Mortgage Refinancing Reasons: home equity
Over recent years in the property market houses have appreciated at a significant rate. e.g. a home you bought for $300,000 five years ago, might now be worth $500,000. Refinancing your Mortgage with a Home Equity Loan might let you tap into that extra $200,000 equity.
Mortgage Refinancing Reasons: defaulting
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 one of our Finance Managers about refinancing your Home Loan to make it more manageable.
Why should I have a regular Home Loan Health Check?
Because things change: interest rates, products and you.
Just because you've spent ages making sure you have the right Mortgage, it doesn't mean it will always be right for you. You need to contact your Finance Manager regularly for a Home Loan Health Check to see if refinancing your Mortgage would suit you.
Mortgage Refinancing Reasons: you change
Over time, your personal and financial situation may change. You may get a pay rise, or decide on a sea-change. You might go from a safe corporate salary to the more uncertain income of the self-employed. You might want to start a family, or need to finance their education. As your needs and priorities change, you'll probably find the right Home Loan product for you will change, and you'll need to refinance your Mortgage.
Mortgage Refinancing Reasons: rate rise
In stable economic conditions, a variable interest rate might look more attractive, while in more volatile periods you could prefer the predictability of a fixed interest rate. Refinance your Home Loan to suit the economic times.
Mortgage Refinancing Reasons: new products
In the past, there was limited innovation in the Mortgage market. But now competition between Lenders is fierce and new products are constantly emerging that might suit your situation better. Our Finance Managers can keep you up-to-date with new Home Loan products that might make it worthwhile to refinance your Mortgage.
What should I do if I can't make my repayments?
Talk to the right people, at the right time
It can be stressful if you find yourself unable to meet your Mortgage repayments and you're in danger defaulting. But you're not the first person to face difficulties, and there is almost always a solution. You just need to talk to the right people at the first sign of difficulty.
Talk to your Lender
You probably won't want to talk about your Mortgage situation. But the problem won't solve itself and avoiding matters won't help. Remember: your Lender doesn't want to foreclose your loan - it's no fun for them either. So call and let them know what's happening.
Talk to one of our Finance Managers
Refinancing your Mortgage in a way that suits your current situation may help. But you're probably not the best person to find a solution. You need to talk to a Mortgage specialist. And that means a member of our team.
If rates rise, should I move to a Fixed Rate Mortgage?
Not necessarily.
When interest rates drop
If you took out a Variable Rate Mortgage, you were effectively taking a view that interest rates in future would be steady or fall. So when the Reserve Bank announces a quarter or half point drop, you'll be feeling pretty clever. But how should you respond?
If your interest rate falls, you could simply lower your repayments and enjoy an improved lifestyle. That's very tempting but not necessarily the way to go.
Pay off more
It might be smarter to take advantage of the lower interest rate to pay off more of your loan. Remember, Lenders tend to load the interest on the earlier years of a loan, so paying more now could significantly reduce your interest charges over the term of the loan - if rates remain low.
When interest rates rise
If you have a Variable Rate Mortgage, an interest rate rise is not great news. However, as always, you have options.
Refinancing to a Fixed Rate Mortgage
The instinctive response for most people when they hear rates have gone up is to switch from a Variable Rate to a Fixed Rate Mortgage. That's understandable. Unfortunately, Lenders in a climate of rising rates will make you pay for that interest rate certainty. Also, you don't have the flexibility of paying off your Mortgage sooner with a Fixed Rate Mortgage. There is another option.
Increasing your Mortgage Repayments
Mortgage Refinancing is generally about one thing: reducing the overall cost of your Home Loan in the long term. If you're going to be paying a higher interest rate, one way to reduce the interest charge is to reduce the amount you owe by actually increasing your monthly repayments - if that's possible. For help with your Mortgage Refinancing, contact one of our Finance Managers today.
What are some other Mortgage Refinancing options?
All-In-One Accounts
At present, you might have separate savings, cheque, credit card and Mortgage accounts. The All-in-One Account, as its name suggests, brings all those accounts into one. The advantage of this Home Loan refinancing option is that money that normally sits in low-interest savings or cheque accounts can reduce your outstanding Mortgage - which is being charged interest at a much higher rate.
What do I need to know about Debt Consolidation?
Not to confuse it with debt elimination.
If you're swamped with credit card debt and personal loans, it can sometimes help to talk to a professional about Debt Consolidation. However, you need to be wary. You might end up paying more in the long term and/or reduce the equity in your home.
What is Debt Consolidation?
Debt Consolidation is where you transfer your credit card debt and any personal loans to your Mortgage. The advantage of doing this is that the interest rate on your Home Loan is likely to be lower than you're paying on your smaller debts. You might also benefit from a regular manageable repayment. However, there are some things you need to be aware of.
Debt Consolidation is not debt elimination
Since Debt Consolidation clears the debt from your credit cards, the temptation is to think that you've paid off the debt. But you haven't. You've merely transferred the debt to your Mortgage. So, once you've consolidated your debts, consider snipping your credit cards in two. Otherwise, you could get trapped in a debt spiral.
Remember the 80% LVR threshold
When you took out your Mortgage, you might have been under the 80% Loan-To-Value ratio, which meant that you didn't have to pay Lenders Mortgage insurance. Be careful when you consolidate your debts that you don't reduce the equity in your home and have to pay Lenders Mortgage Insurance.
Personal loans aren't tax deductible
Interest charges on an investment loan are tax-deductible but interest on a Home Loan isn't. When you consolidate your debts, you need to be mindful of how much interest you can claim as a tax deduction. Seek advice from a tax agent before making a decision in this area. To learn more about Debt Consolidation, speak to one of our Finance Managers.
Source – MFAA