Refinancing Your Home Loan: A Guide
Refinancing a home loan is a common topic these days, as homeowners seek to get the best deal possible on their mortgage. But what does it mean to refinance exactly, is it worth it, and how do you do it?
Take a look at our guide to refinancing and discover more.
What Does It Mean to Refinance Your Home Loan?
When you refinance your home loan, you are effectively opening up another mortgage or loan in place of your initial one. Let’s say you took out a mortgage over a loan term of 30 years, but your circumstances change before this time has elapsed. Perhaps you believe you could get a better interest rate by changing your mortgage, or maybe you would like to consolidate other debts within your mortgage repayments. You may decide to refinance.
It is possible to refinance without changing mortgage providers. Your provider might be able to offer you a different home loan product that better suits your needs and expectations. In other cases, however, you might end up switching providers altogether, working with a mortgage broker to find a better deal elsewhere.
Some mortgages will have different features – for example, some loan products will permit home buyers to pay down the principal loan amount early, saving money on ongoing interest costs, while others will not. If you believe you could benefit significantly from these features, but they are not available on your current loan, it may be time to refinance.
A common reason for refinancing is switching from a fixed rate home loan to a variable rate product, or vice versa. This could help you to save money on the loan across its full term.
It could be possible to release some of the equity you have built up in your home, essentially starting from scratch with a new mortgage. While this can be a risky strategy, it could be beneficial with the right approach and the appropriate guidance.
Note that we mentioned ‘potential’ advantages above. Refinancing is not a surefire way to improve your situation, save money, or achieve your financial aims, such as purchasing an investment property. Instead, there are a number of different aspects you’ll need to bear in mind as you consider whether this option is right for you.
There will always be a cost associated with refinancing your mortgage – for example, the break costs that come from ending your previous mortgage agreement and any brokerage fees that are applied when searching for a new loan product. You may also need to pay lenders mortgage insurance (LMI) if your loan-to-value ratio (LVR) is high.
Refinancing generally means you are extending the length of your total loan term. This could result in increased total expenditure.
You may find that refinancing has a negative impact on your credit score, which can have a knock-on effect on your ability to apply for credit at a later date.
You may have a specific owner-occupier mortgage, designed for purchasing a residential property. If you decide to refinance, you’ll need a similar loan type. For instance, a commercial property loan won’t be suitable for your residential home, even if the rate is better.
How to Refinance
Refinancing requires research. You will need to take into account the full comparison rate for the mortgage you currently have and for the loan you may want to refinance to. This represents the full cost of the loan – i.e., the interest rate plus any charges and fees – so you gain insight into whether or not the decision is right for you.
You’ll also need to consider your credit score. Refinancing can reduce your credit score, but a poor credit history may mean that the loan you desire is not available to you. It is best to speak to a broker or advisor directly so that you can work together to find the right option for you.
Here at Sydney Brokers, we want to help you make the right choice in the market. Reach out to our team, and let’s discuss your refinancing options.
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.