As interest rates continue to rise through the third quarter of 2022, many Australian homeowners are facing a significant question: Am I getting the best deal on my mortgage?
In many cases, the answer may be ‘no’, but what can be done about this? One possible option is to refinance the home loan and move to a more suitable product, but this is fraught with potential pitfalls and hazards.
Read on to learn more about when you should consider refinancing your mortgage and what you’ll need to bear in mind if you do.
Refinancing Aims
When considering whether to refinance your mortgage, you need to think about your aims — what are you trying to achieve by refinancing? Refinancing always has risks and downsides, and you’ll need to ensure that the positive benefits outweigh these risks.
Reducing Your Interest Rate
One of the most common aims when refinancing a mortgage is to reduce the interest rate you are paying. You may find that your current home loan is not providing you with a favourable interest rate, and you may suspect there are better options out there. Refinancing can help you gain access to one of these more competitive mortgages.
Shortening the Mortgage Term
Generally speaking, the longer your mortgage term, the more you are going to pay overall. For instance, you will pay more interest on a mortgage that is 30 years long than you would on a 25-year product, even though the monthly repayments will be lower. If your financial situation changes and you find yourself able to pay off the mortgage more quickly, you might want to refinance and switch to a mortgage that will allow you to do this.
Shifting Between Mortgage Types
This is a very important consideration in the modern environment. While there are many different types of mortgages, these types are split into two general categories — variable-rate mortgages and fixed-rate mortgages. Interest on a variable rate mortgage will track alongside the cash rate set by the RBA, which means it has increased significantly in 2022. On the other hand, interest on a fixed-rate mortgage will be locked in for the full term. Refinancing may allow you to move from one mortgage type to another.
Accessing Home Equity
You may also want to access the equity you have already built up in your home. Refinancing may provide this option, allowing you to use the cash value you have already built up for another purchase, investment or strategic financial move, essentially resetting the loan repayment period.
Deciding on the Right Time to Refinance
Once you have established your aims, what’s next? Well, you need to make sure that now is the right time to refinance, which means weighing up the different costs involved with the project. You’ll need to consider the following;
Your Current Financial Situation
It’s very important to bear in mind that refinancing is not free. If you choose to refinance with a different mortgage provider, you may need to pay an application fee. You may also need to pay an establishment fee or bear other costs on an ongoing basis. Even if you stay with the same mortgage provider, there will be closing costs that you will need to pay. In addition, Lenders Mortgage Insurance (LMI) might be required.
You’ll need to weigh up all of these costs against your current financial situation and against the cost of continuing with your existing mortgage. Even with the costs factored in, does refinancing still make sense?
Movements in the Market
Variable rate mortgages can move up as well as down. If you were to pay all the associated fees and shift from a variable to a fixed-rate mortgage, only for the interest rate to decrease, you might lose out. Forecasting and prediction are important as you decide whether or not to refinance your mortgage.
Product Availability
As well as identifying the situation with your current mortgage, you’ll need to make sure you are able to get a better deal with another product. This means identifying which refinancing options represent a better deal for you — if there are no significantly better deals currently on the market, it may not be the right time to refinance.
Speak to Sydney Brokers and Learn More About Refinancing
Want to gain a better understanding of the market? Reach out to our team and learn more about whether now is the right time to refinance.
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.