5 reasons to consider refinancing and how it works
What is refinancing?
Refinancing is the process of replacing an existing loan with a new one.
Many Australians refinance their loans to get a better interest rate and, in an environment where “the rates” are always changing, there’s almost always going to be a better rate out there for your needs. Aside from the cost savings, there are also a number of other reasons to consider refinancing….
- You want to get a lower interest rate on your existing loan
The most common reason we have found that Australians refinance is to get a lower interest rate. This can make a massive difference to your repayments.
The question you then should be asking yourself is what to do with the savings? Being in finance we would suggest considering putting the savings at least in part towards your loan (i.e., making extra repayments). This has many benefits including reducing the overall interest you pay, paying off your loan sooner and building more equity in your property. Check out our resources page- we have a calculator called “extra repayment calculator” that can help you to work out how much time and interest you can save on your loan.
- You want a fixed-rate loan
You may find that a fixed-rate loan offers a lower interest rate than your current variable interest rate. It also gives you peace of mind knowing what your repayments will be for the fixed term and further protects you should interest rates rise.
- You want a “large” cash injection
Many people use their home equity to extend their loans to make large purchases. For example, paying for children’s education, renovating, buying a second property or investing in shares.
- You want to consolidate debt
You may have a car loan, credit card debt, personal loan or other debts that offer unfavorable terms and high interest rates that are “getting out of hand”. By refinancing your home loan, you can pay out your personal debts and be left with a single repayment at a potentially lower rate.
- You want to buy a second property
There are many benefits associated with buying a second property including potential tax savings and growing your wealth. Refinancing allows you to release this equity and expand your property portfolio. Not only saving money, but you could also purchase your second house by using your equity.
How does refinancing work?
Step 1: Figure out the ‘why’…
When it comes to refinancing (as with a lot of things in life), you need to figure out your why. We have presented 5 reasons which might help you here, but you need to make an informed decision that’s right for you.
Step 2: Evaluate the costs
There are costs associated with refinancing from your existing lender (such as exit fees or penalties) as well as costs with the new loan. Your current loan Terms and Conditions will help you to work out your current costs and it’s also good to confirm these with your current lender. When considering the costs of the new loan, be sure to include establishment costs as well as ongoing costs.
Step 3: Find the right loan
Find a loan that is right for you. Start by writing down a list of things that are important to you with a loan such as an offset account(s), redraw facilities, the ability to make extra repayments etc.
Step 4: Apply to refinance
You will need to complete a loan application and be ready to supply documentation like your income and expenses, assets and liabilities and employment details.
Step 5: Settlement
About 4-6 weeks have passed and you have your new home loan. Well done!! After settlement, your new lender will ‘draw down’ on your loan — this is how your lender will pay off your old home loan using the funds from the new loan.
Did you know- Almost one in four Australians believe refinancing is a good idea for saving money on their mortgage but say they can’t find a more competitive rate. We can help. Book a free consultation to find out more– it may pay off in the long run.
