While mortgages and home loans are generally viewed as unbreakable legal agreements, you do have some flexibility and control. For example, you can choose to refinance your mortgage, essentially changing the monthly repayments as well as the full term of the loan.

But is this a good idea or a bad idea? In many cases, it’s the latter — which is why this process should always be approached with a careful and considered mindset. Read on to learn more about when not to refinance.

When unsecured debts are piling up

Your mortgage is intrinsically connected to your property, and it is this property that provides security for the mortgage loan. Debts from credit cards and other credit facilities are unsecured. When these unsecured debts begin to pile up, it’s tempting to consolidate debt altogether, benefiting from the lower rate of interest.

Tread carefully here. Now that your credit card debts are secured against your property as collateral, you have more to lose in the event of a default. You could lose your home rather than simply taking a hit on your credit score. While debt consolidation can be useful for consumers, it is important to approach this method with great care. Refinancing your mortgage is not a magic wand that will make other debts disappear.

When you want to reduce your monthly repayments

Let’s say you are 20 years into a 30-year mortgage term and you decide your current mortgage loan repayments are too high. You realise that refinancing can help you spread the remaining 10 years of payments out over another 30 years, drastically reducing your monthly outgoings.

While this will save you money on a monthly basis, it’s going to cost you a lot more in the long term. This is because you are exposing yourself to a far greater level of interest over the full duration of the loan, not to mention extending your mortgage repayment by another 30 years. Use a mortgage calculator to find out exactly how much you can expect to pay in interest when you refinance your home.

When you want to invest your built-up equity

A cash-out refinance product can see you release equity in your home, which you can then use for another purpose — such as investing. While this may seem like a good idea, it requires thorough planning and discipline. It will be tempting to use this additional cash for other purposes, and you may end up depleting some of this equity before you get around to making an investment.

Also, you need to consider the fact that purchasing a home is an investment in itself. Is it really worthwhile to cash out on your equity and invest this cash elsewhere? Do the maths carefully — you may discover that it is better just to work towards paying off your mortgage.

When you want to move in the near future

If you want to purchase a new home, reducing your current mortgage rates probably sounds like a great idea. After all, finalising a home purchase is expensive — especially once all the closing costs are taken into account — so you need to save as much money as possible.

However, this may be a bad idea if you plan to move house soon. Bear in mind that it costs money to refinance your home loan, and you will have to recoup this money before you start benefiting from your savings. If you move house before you have recouped this money, this becomes a very bad idea indeed, and you will have basically wasted the funds you spent on refinancing.

When you are tempted by ‘no-cost’ products

Just as there is no such thing as a free lunch, there is no such thing as a “no-cost” refinancing product. There are always fees and charges that will need to be paid one way or another, and the mortgage lender may offer a no-cost refinance but negate this with a higher interest rate.

To put it simply, you should only refinance when you decide that this course of action will actively help you achieve your aims. You should not be influenced just because you have seen a refinancing option advertised as “no-cost”.

Find out more about refinancing and optimising your mortgage

Here at Sydney Brokers, we are committed to helping our clients get more from their mortgages. Whether you need a new home loan or you are looking to refinance, reach out to our team to get started today, or use our mortgage calculators to understand more. Give us a call on 02 9160 7654

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.