So, with the RBA’s cash rate at an all-time low, the question being asked by many home owners is “should I refinance?”, the answer is, “it depends”. This is why coming to us, or finding a mortgage broker that understands your needs, is so important.

Before any decision to refinance can be made (or any lending decision for that matter), you should consider the ‘3 dimensions’ to lending, the purpose, the lender, and you:

1. Why do you want to refinance? What purpose will it serve? Do you want to pay down more of your mortgage? Are you looking to take equity out of your home? Are you looking to simply reduce your payments? These are just a few of the very important questions that can help find your purpose. The purpose is just as, if not more important than finding the right lender or the best rate.
2. Are you happy with your lender? Do you feel they have offered or can offer you a better rate? Do the features you have suit your purpose, or are they outdated?
3. Has your situation changed? Have you got married? Have you had your first child, or maybe it’s your 3^rd or 4^th or more? Did you get a promotion or pay increase from your employer? Have your living expenses changed?

Understanding what’s changed for you, what you want out of your lender and what’s your purpose all play a vital role in deciding whether you should refinance or not. Remember, refinancing may not always be the right solution for you, and chasing short term wins is not enough of a reason to refinance, and that’s ok, other options might be available to you or, it may be best to wait a little longer until the time or right reason comes around.

When refinancing might not be right for you:

• You’re in the home stretch of current loan (i.e. 10 years left on your 30-year loan) and you refinance to a longer-term loan. It’s a known fact, in the early years of any home loan, you end up contributing most of your regular repayments towards interest and less towards the principal. Once you reach the half way point of your term, the reverse starts to happen. Therefore, refinancing at the latter stages of your loan term means the process of more interest over principal starts again as the loan is renewed, you’ll end up paying more interest over the course of your borrowing journey.
• You’re looking to move in the short term (i.e. 5 years or so). Refinancing comes at a cost. In order to leave one loan or lender and commence another or with another, there are costs; costs for leaving and costs for joining. If you are intending to move again or feel that a move is on the cards due to work or other factors, then staying put might be the best option, even if it means paying a higher interest rate for the short term. The reason. It might be a few years before you break even from the impact of the exit and entry fees, the cost of refinancing might not outweigh the benefits.
• You’re looking to spend on life’s little luxuries, such as a new sports car or motorbike or caravan or designer jewellery, etc. Whilst all of these sounds exciting, the cost of funding these luxuries might end up putting you in a worse position than when you started. Remember, each of these luxuries will be secured against your home, so whilst you can make the repayments today, what happens if/when you can’t, are you willing to give up your home to pay for them? If it doesn’t add value to your home, are provide security to your financial position then don’t refinance for it. Simple.
• Your household income or credit history has been impacted (i.e. you’re down from two salaries to one, or you’ve defaulted on a number of credit card repayments). An obvious one, but one that still deserves a mention, especially in these troubling times. The temptation to refinance to improve your financial position is one that is hard to resist, however fight against it, because chances are, it won’t. Lenders usually look at job security, credit scores, the financial well-being of borrowers and, in the case of refinancing, the amount of equity you have built up within your existing loan, if any of those factors impact the serviceability of the new loan then chances are you will be declined, not something you want added to your credit record, especially if your situation is temporary and will likely improve over time. A better idea could be to budget, spend less on the luxuries and pay down your credit cards, it’ll require a bit of willpower but you’ll thank yourself in the long run.
• You currently have a fixed rate loan. Whilst it’s not impossible to break a fixed rate loan, the question is, is it worth it? If you’ve fixed it for 2 years and your 2 months in, then probably not. If your 22 months in on a 2-year loan then it maybe an option. The key here is, what are the break costs? What other fees are applicable for discharging the loan? What fees apply to the new loan? Once you’ve work all of that out, then compare what you’re current repayments are vs what your new repayment will be on the current variable rate or ‘re-fixed’ rate PLUS the break costs, if the difference won’t be recouped within the remainder of your current fixed term, then it may be a good idea to stay put until the term ends.

When refinancing could make sense:

• The value of your property has increased. This creates a number of opportunities. If you’re LVR has now dropped to below 80%, you might qualify for an even greater discount on your interest rate compared to the advertised rate, making your repayments more manageable or allowing you to make extra repayments to your loan using the savings. An increase to the value of your property might provide access to equity you previously didn’t have, allowing you to add value to your home through renovations, put a deposit on an investment property or to tidy up your current short-term debt.
• To secure a more competitive interest rate. One of the best reasons to refinance is to find and secure a lower interest rate for your current loan. If the math makes sense, reducing your interest rate not only helps save you money, but it also improves the rate at which you build equity in your home, as well as potentially decrease your regular repayment amounts. Any savings you make each month can then be put back into your loan as extra repayments, further reducing the life of the loan and the amount of interest you pay over that life.
• To consolidate debt. This one can be tricky if not managed correctly. Debt consolidation makes sense when you are trying to replace high interest debt (i.e. credit cards and personal loans) with a low rate mortgage. This can help improve your debt management (especially if you are struggling to keep up with the individual repayments and have not defaulted yet), but more importantly, the savings can help pay down the debt sooner (albeit stretched over a longer timeframe). Moving debt around is not the same as paying it off, so clearing your credit cards only to build up the debt again does not make this an effective solution. You will need to consider a budget, or even cancellation of your credit cards to make refinancing for debt consolidation a viable solution.
• You’re wanting to buy an investment property. If building a property portfolio is one of your goals then refinancing (or a cash-out loan) might make sense. If the value of the property has increased or you’ve made extra payments to your loan, then refinancing can allow you to access the equity in your home, potentially at a lower interest rate, to serve as a deposit on an investment property. This strategy only works if you do not exceed the 80% LVR on your current loan and your deposit makes up 20% of the deposit on the new loan, or else you could end up paying Lenders Mortgage Insurance across both loans, not to mention the fees and charges associated with acquiring a property (i.e. stamp duty, transfer fees, etc).

The bottom line

Refinancing is not for everyone, but where it makes sense, it does serve a purpose.

It is a good idea to be checking and reassessing your home loan every 2-3 years (at least) and comparing not only against other loans in the market but also new loan products offered by your current lender. By doing this, you can determine if your current loan continues to be the best product for you or whether there are features and flexibilities another product can provide you, or whether you’re paying too much in fees and charges on your current loan compared to other products in the market.

For help refinancing or any of your lending needs, please contact us, we would love to hear from you.