Refinancing your mortgage is a term that’s thrown around as a lucrative financial move that can allow homeowners to take advantage of low interest rates, change loan terms or access extra cash to upgrade their home or even invest in an investment property.
But, while many people are familiar with the term, a lot of Australians are overwhelmed with the concept of comfortably understanding what it means, and may be cautious about adjusting their home loan.
Here’s a look at what exactly refinancing your mortgage is, and how it can be beneficial.
What exactly does refinancing your mortgage mean?
Essentially, refinancing your mortgage means paying off your entire mortgage with a loan, and refinancing it with a new loan. This new loan will more than likely have new terms and a new interest rate.
When refinancing is done correctly, it allows homeowners to lower the interest rate on their entire loan, and in doing so, shorten their entire repayment timeline. A popular time to refinance a mortgage is when interest rates drop significantly.
However, refinancing a mortgage isn’t as simple as trading in one mortgage, for an updated mortgage with better terms. This is where a mortgage broker comes in! They will let you know all of the steps you will need to take, advise you on any additional costs and lead you down the most suitable path to get you the best rates, with the end goal to save you a lot of money in the long run.
If you’ve decided to refinance your mortgage, you’ll have two options: internal refinance or external refinance.
Internal refinance is when the loan is cleared by the current bank or financial institution the mortgage was issued from, and then reinstated through the same financier under new terms.
External refinance is when a new lending institution or bank pays off your existing mortgage, and the new mortgage is taken out with that financier. The benefits of refinancing to a new bank could be a better rate, term and set of products offered by the financial institution altogether.
What are the benefits of refinancing your mortgage?
Changing the loan length
A few years after taking out their initial mortgage, a homeowner may find themselves in a better financial position where they’re able to pay off their mortgage sooner. Reducing the time of the mortgage means paying less interest in the long run.
For example, the homeowner may have initially taken a mortgage with a payment period of 30 years. Five years into the mortgage, they may want to increase their payments so that they can pay the loan off quicker. In this case, they could pay down the mortgage on a voluntary basis through additional repayments under a ‘Variable Interest loan’. They can then reduce the repayments if cash gets tight and also potentially redraw against the additional funds they contribute with little cost and effort.
Taking advantage of lower interest rates
Every so often, interest rates hit an all-time low (like they are right now!) – this is usually related to the economy, or a bank may have a special deal. In these cases, if a homeowner calculates that the total payable will be a reduced amount – with the fees involved with refinancing taken into account – then they may want to refinance. It’s important that borrowers stay up to date with current interest rate changes as increases and decreases can affect their repayments for the better or the worse.
If interest rates are likely to go up, borrowers can choose to ‘fix’ all or a portion of their loan in order to reap the benefits of low interest rates for a period of time even when rates start to increase!
Cashing out Equity
Cash out refinancing basically involves the homeowner taking a bigger loan out on their mortgage, than what they currently owe. This is usually down to when a house has risen in value since it was originally bought. The difference in the two home loans can be available in cash and is usually a loan available at a much lower interest rate than other loans.
For example, a homeowner may have initially bought their house at $500,000, but over time the value has risen to $750,000. The homeowner still owes $200,000 on their mortgage, but refinances their mortgage for a loan of $300,000. The $200,000 goes straight towards the house, and the $100,000 is available in accessible funds. The homeowner may feel comfortable doing this because their house is worth much more than it originally was.
After reading all of this information, you might be wondering if you could be getting a better rate or terms on your current mortgage. Interest rates are at an all-time low for Australians, so now more than ever is the perfect time to look into refinancing your home loan, as it will inevitably start to incrementally rise.
If you want to look into your options and seek advice on refinancing your mortgage, reach out to our finance team at firstname.lastname@example.org .