Reasons To Refinance
Reasons To Refinance & Five Ways To Benefit
It’s easy to see your home loan as a bit of a ‘set and forget’ proposition. Changing your financial arrangements can be time consuming, frustrating and confusing. But what that often means is you are inadvertently paying a higher rate on your mortgage than you need to, and over time this can add up to a great deal of money, which is one of several reasons to refinance.
So with interest rates rising, we thought it worth highlighting how you can benefit by going to the trouble of refinancing. And it all starts with the interest rate.
1. Lower Interest Rate
In a rising market, finding a better rate for your mortgage is a very attractive proposition. It’s important here not to look only at the honeymoon rate offered by so many banks, but at the ongoing rate, fees and structure of the loan. If you can get a lower interest rate, the other benefits of changing finance providers will become apparent.
2. Reduce Your Loan Repayments
As night follows day, if you are paying a lower interest rate, your minimum repayments are reduced. In a high inflation environment, this can be a very attractive option, freeing up more of your income to live on. However:
3. Shorter Loan Term
Rather than reduce your repayments, you can also choose to leave them as they are, and shorten your loan term. You will own your home sooner, and reduce the overall interest you pay by reducing your principal more quickly. And:
4. Variable vs Fixed
When you move to another loan provider you can change from fixed to variable, or vice versa. In a rising rate environment, fixing your rate can be a good idea. Or you can choose to have a mix, providing you with the best of both worlds. Also:
5. Equity Access & Consolidation
Moving to a new provider can allow you to access the equity you have already built up in your home, providing you with money for renovations or a long overdue holiday. Alternatively, you can consolidate higher interest products, such as credit cards, personal or car loans, into your much lower interest rate mortgage. Be careful here, though, not to go straight back to loading up that credit card, as this is just creating a bigger financial burden in the longer term.
The Argument For Staying Put
Now that we’ve outlined the reasons to refinance your home loan, let’s take a quick look at why you might stay with your current loan provider.
Moving your home loan to an alternative provider can sometimes come with associated costs. Many loans have early payout or exit fees. There will also be costs associated with setting up a new loan. So crunching the numbers is important.
If the difference in rate is too small, or if you only have a very short time left till your loan is fully discharged, it may not be worth the effort and expense.
It is also entirely possible your current rate is actually competitive, and you should stay where you are. Moreover, if you have been happy with the service your provider has delivered, or you have had a poor experience with other lenders in the past, you may not feel inclined to move. In this case, it is worth contacting your existing finance provider to at least give them the opportunity to match rates or restructure you loan arrangements.
How To Refinance Successfully
If you feel you have good reasons to refinance, the first thing you need to do is a comparison. A professional financial advisor can help you understand and compare apples to apples. You may also like to take a look at a couple of our previous articles on mortgage rates and home loans, including Maximising your Mortgage (July 2020), where we talk about split interest rates, comparison rates and repayment schedules; and Home Loans (November 2022), where we help you understand how to calculate your repayments.
Before you start talking to alternative providers you should also think about how or if you might want to restructure your loan. Do you want to access some equity, or consolidate. Essentially, have all your thoughts clear so you are in a strong position to negotiate.
Armed with your research, approach your bank and ask what they can do for you. If their offering doesn’t compare favourably, it could be time to move on.
When you move your home loan, it can also be a good time to think about your other financial arrangements. Does the new loan provider you have chosen offer other financial products you might need, like term deposits, credit card and transaction accounts. If you are going to move all your banking, let the new provider know, as banks have sophisticated algorithms around the value of a customer, and you may find you can negotiate an even better deal if you are porting all your banking at once.
If this is the case, don’t forget you will need to change details with:
- Automatic monthly or yearly payments or direct debits like health insurance, phone bills, internet or streaming services
- Organisations you do business with who hold your credit card details, like online retailers, PayPay or any afterpay services
- Regular payments to charities
- Your employer
- The tax department
- Anyone who regularly deposits money into your account from income like share dividends, rental properties and the like
Often, the financial provider you are moving to will be happy to assist you with sorting out these arrangements, so don’t be afraid to ask.
If you would like to evaluate whether you have good reasons to refinance, need help determining the best mortgage deals available, or want help identifying what type of mortgage will provide you with the greatest benefits for your personal circumstances, Manly Financial Services are here to help. Give us a call on (02) 9976 3388 or contact us via the below link.