What Is Refinancing?
What Is Refinancing?
We’ve talked a lot recently about mortgages and is it any wonder? With interest rates as they are, the cost-of-living biting everyone, it’s only natural to think about how your biggest investment, is impacting your overall financial position. Having looked at Reasons to Refinance, we thought it might be a good idea to look at what is refinancing, and how you go about it.
What It Means
It’s not quite accurate to talk about changing your home loan as ‘refinancing’. In fact, what you are actually doing is ‘replacing’ your home loan, either with your existing provider, or another lender. The replacing of your mortgage may, or may not, include substantial changes to the terms and conditions of your original mortgage.
The elements of a mortgage that will generally change when you ‘replace’ your home loan are:
- Term Of The Loan – you may shorten or extend your home loan term, depending on what you are trying to achieve
- Interest Rate – you will generally be looking for a better interest rate, although if you are looking to move to a fixed rate mortgage, or from a principle and interest loan to an interest only loan this might not always be the case
- Amount Of The Loan – you may decide to access the equity you have in your home for renovations or some other expenses, or you may pay down a lump sum in order to reduce your level of debt
Before You Decide To Refinance
If you are thinking about refinancing there are a few things you should determine before you take the leap:
- What is refinancing going to achieve for you? Are you looking to reduce your monthly payments? Are you prepared to extend the term of your loan to accomplish this? Or are you looking to pay your loan off earlier, so you can retire? Establishing why you are refinancing will help you determine what type of mortgage to look for. If reducing your payments is your primary objective, you might consider an interest only loan. If paying off your loan early is the objective, a shorter term or variable rate might work best. If you are looking for certainty in your repayments, perhaps a fixed rate loan would suit,
- Do the maths – it’s very easy to be enticed by a shiny low interest rate. But will changing lenders come with large payout fees, or hefty setup fees? Depending on the rate, and the length of time left to pay out your loan, an apparently great interest rate may end up costing you money, especially if it’s a limited term honeymoon rate.
- Consider your overall financial position. Talk to your financial advisor. It may be that changing your financing will impact other aspects of your financial arrangements, which could be detrimental.
- Getting an up-to-date valuation on your home is essential if you are thinking about refinancing. You need to have a clear picture of your equity position in order to make the right decisions in relation to your mortgage.
- Consider the prevailing market. Are rates going up, as they have been recently, or will they potentially remain the same, or drop in the near future? What might this do to the value of your home, and therefore your equity position?
When To Refinance
Whilst you should be reviewing your mortgage regularly, there are a few key points where thinking seriously about refinancing makes a great deal of sense.
- If you are having trouble meeting your loan repayments on a regular basis
- If you have recently come into a sum of money that could be used to pay down your mortgage
- If you have multiple high-cost loan products like personal loans and credit cards that could be rolled into your mortgage
- If you have a large amount of equity in your home and would like funds to renovate, travel or for any other reason
- If you have had either a positive or negative change in your income or personal circumstances and would like to pay more, or less, off your mortgage on a monthly basis as a result
Does Refinancing Impact My Credit Rating?
This is something you should take into account when you first think about refinancing, because your credit rating can affect everything from applying for a new credit card to changing phone providers. The answer to this question depends entirely on how and why you refinance.
If you refinance to roll personal debts like credit cards, personal or car loans into your mortgage, your credit rating could actually improve, because you have less high-cost debt.
If you refinance to draw down equity to spend on renovating your house it will depend on the loan to value ratio created by the renovations you do. If you overcapitalise, even in the short term, it could be detrimental. But if the value of your home increases exponentially, it will likely have a positive impact on your equity position, and therefore your credit rating.
If you are refinancing to obtain a better interest rate, this is likely to have a positive effect on your credit rating, as your outgoings will be reduced.
A good financial advisor will be able to tell you how your plans are likely to affect your credit rating and future borrowing potential.
The Bottom Line
Keeping an eye on the effectiveness and continued suitability of your mortgage is always important, but never more so than in a changing interest rate or high inflation environment.
It’s worth talking to both your financial advisor and a good mortgage broker from time to time to make sure you are maximising your position, and minimising costs.
If you would like to chat about what refinancing your mortgage can do for your overall financial position, whether your mortgage could be working harder, or where you might find a better deal, Manly Financial Services can help. Give us a call on (02) 9976 3388 for a chat, or reach out to us via the various options on this website.