What is Refinancing and When Should You Do It?

Refinancing is essentially when a homeowner switches from their current mortgage plan to another (yes, it’s possible!) This may be done for a number of reasons including homeowners wishing to take advantage of lower market rates, personal circumstantial changes, or perhaps simply wanting to shop for a better deal. Whatever your reasoning for considering refinancing, we’re here to guide you through the basics of what refinancing is and when the optimal time is to do so.

Home Loan Refinancing - The basics. 

The process of securing a refinancing mortgage is very similar to that of how you mortgaged your property originally. Like mortgaging your house for the first time, you’ll want to start off your refinancing journey by researching. Things you should be looking out for include; interest rates, upfront costs, and ongoing costs, these may include a loan establishment fee, mortgage registration fee, a settlement fee, and/or exit fees and charges.

When should you refinance? 

1. Better interest rates available: One of the main reasons people refinance their home is simply that there are more competitive interest rates available to them than they originally had with their first mortgage. As well as this you may be looking for up-to-date features that weren't available when your first mortgage was taken out. These could include features like flexible repayment options, loan splitting, or redraw facilities. 
   
   
2. You need an additional loan: If you’re looking to take out an additional loan, it may be worthwhile looking at refinancing as a viable option.  You may be able to use the equity of your home to contribute towards this additional loan, for things like renovations, or tertiary education. 
   
   
3. Avoiding market fluctuations: If your current mortgage has an adjustable rate, it might be worthwhile moving to a fixed-rate mortgage to avoid market fluctuations, and therefore decrease the risk of having to pay increasing interest rates. 
   
   
4. Your personal finances have changed: If you can now contribute more to your mortgage each month than you originally planned, it might be worthwhile looking to shorten the length of your mortgage to end up paying less interest in the long run. 
   
   
5. Consolidate debts: If you have a number of different loans, it may be worthwhile looking at refinancing as a way to consolidate your debt, making life easier and potentially a more financially sensible way to pay back your debt.

What are the risks? 

1. More interest: If your repayments are longer than your original mortgage, you may end up paying more interest over time, and therefore the mortgage may become more expensive.
   
   
2. No guarantees: There’s no guarantee that if you decide to re-mortgage you will get a better deal, so don’t invest too much hope unless you have done your research prior. Additionally, you may be relying on a better credit score to secure a better mortgage deal, but if market rates have increased significantly since your first loan, this may be not enough to help you score a lower interest rate. 
   
   
3. Can be costly: Refinancing can cost anywhere from 2% - 5% of the principal of a loan, alongside this you must take into consideration appraisals and application fees. Therefore, it is extremely important to revise your accounts to determine if the refinance will end in financial gain or loss. 

To finish, refinancing your home can be a great way to save money over the life of your mortgage or may assist you in making other life goals achievable. However, it is very important to research and compare the market before you switch from your current plan to save on making any unnecessary financial losses.

If you would like more information, don’t hesitate to contact us at Clarke & Humel.