Considering refinancing your mortgage? Here are some questions to ask
Home loan not up to scratch? Looking for a better rate? Or do you want to unlock equity? Then refinancing could be for you. But there are some important questions to ask first.
If you’re considering refinancing your mortgage, you’re not alone.
With the rising cost of living and interest rates hitting the hip pockets of many Australians, it’s a popular move.
According to ABS data, November 2022 saw refinancing values reach a record high of $13.4 billion.
Refinancing your mortgage can offer you many benefits, including the opportunity to unlock equity, land a better rate, and avoid loyalty tax.
Loyalty tax is a term used to describe the higher interest rates that lenders often charge to existing customers. By refinancing, you can shop around for a better rate and potentially save hundreds or even thousands of dollars each year.
Another reason to refinance is if you are about to come off a fixed-rate loan period and are bracing for a potential rate hike.
When your fixed-rate period ends, your interest rate will likely reset to the variable rate. If interest rates have risen since you took out your loan, your monthly payments could increase significantly. Refinancing now could lock in a lower rate and protect you from future rate hikes.
What’s your financial picture?
Banks want to see your financial health before they lend you money. So make sure your credit score is in good shape to avoid disappointment.
How much can you afford?
Take a look at your budget to see how much you can afford to pay toward your mortgage. This includes interest, repayments, and service fees. You should also factor in possible additional refinancing costs, such as application and valuation fees.
The length of your loan matters
The length of your loan will also impact your budget. A longer-term loan will usually have lower monthly repayments, but you'll pay more interest over the life of the loan. A shorter-term loan will have higher monthly repayments, but you'll save on interest payments in the long run.
Here are some additional things to consider:
Your income and expenses
Your debt-to-income ratio
Your desired monthly payment
Your retirement goals
Your risk tolerance
Do you have equity?
Having 20% equity in your home is typically a lender requirement when refinancing.
But what is equity?
It’s the difference between the market value of your property and the balance of your mortgage. And with the recent decline in property values, it’s an important thing to check.
The 20% equity typically acts as a deposit. Not having 20% may mean you have to pay lenders’ mortgage insurance, which may make refinancing not worth your while.
And negative equity – when your mortgage balance exceeds your property’s value – would most likely put the brakes on refinancing plans.
But if you have additional equity you may be able to unlock it when refinancing.
Let’s look at an example – say your house is now worth $1 million. But you bought it for $800,000 a few years back with a $600,000 loan that you’ve paid down to $500,000.
Banks typically allow a loan for 80% of a property’s market value (depending on your financial position and other factors). So if you refinanced your $500,000 loan to an $800,000 loan, that could unlock $300,000 for things like reno projects or investments.
What are you looking for in a loan?
Interest rate is usually the top priority for borrowers, but there are other features that can also save you money. For example, an offset account can help you reduce interest by offsetting your loan balance with your savings. You may also want to consider a loan with the ability to make additional repayments without incurring penalties.
Depending on your specific needs, you may not need to move to another lender to get the best deal. We can always talk to your current lender to see if they are willing to match the terms of a new loan. If not, we can then explore your options further afield.
Get in touch
Want to refinance to unlock a better interest rate, features and benefits, or equity in your home? Give us a call.
We can help assess your situation to see what’s possible. And locate loans and lenders that are a great fit for you.
Get your pre-approval today!
Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.