What Is Refinancing and Is It For Me?
Refinancing is simply the process of switching or replacing a loan (or multiple loans) to benefit you in some way. Usually this involves finding a better deal on a loan for what is likely the biggest investment of your life - your home loan/mortgage - but it could also include making your personal or business loans fit you better too. Typically, refinancing is done to take advantage of a lower interest rate and save you money – potentially tens of thousands of dollars across the life of your loan!
What are the benefits of refinancing?
Aside from a lower interest rate, there may be a few other perks to refinancing depending on what you’re looking for in a loan. There could be:
fewer fees to pay
lower monthly repayments to improve cash flow
more flexibility in putting money in or taking money out
the convenience of having all of your accounts with the one lender (which may also give you more bargaining power and other benefits)
the ability to switch from a fixed interest rate to a variable rate or vice versa if one or the other suits your situation better
the chance to borrow a higher amount if you need to (maybe for future investments or major repairs for example)
What are the pitfalls of refinancing?
There is always some risk, in terms of maximising your potential savings, in switching loans from a fixed to a variable rate or variable to fixed. Interest rates change and no one knows exactly what they will do in future; though a trusted advisor can help you decide the best path forward. There may be tricky or hidden features of the new loan that mean it’s not right for you.
Maybe you can only link one account to it when you want a few other investment accounts to feed into it for example?
Maybe an interest-only loan changes after a set time period to force you to start paying off the amount borrowed which means you’d need to refinance again anyway?
Or maybe you’ve gone with a no-frills lender who doesn’t have a good mobile app but you need to do all of your banking online?
Then you’d be left with something isn’t fit for purpose and you’d have to pay break fees to change and go through the whole process again. Here, expert advice from a professional who can look at your entire financial situation and overall plan is the key to ensuring your refinanced loans are right for you.
When should I refinance?
Do you remember everything you had to do in order to secure your existing loan? You’ll have to go through pretty much the same process again to refinance. With guidance from a good mortgage broker or financial advisor it shouldn’t be too painful a process! However, there is a bit of time and paperwork involved, so you probably don’t want to look into refinancing too often (it’s likely the fees and charges involved will eat up any short term gain anyway). Our in-house home loan expert Toby Box says giving your loans a check-up every three years is a good rule of thumb. Otherwise, it’s wise to take another look at them before a big purchase, investment or major life change like having kids or going back to school.
Still thinking of refinancing? Chat to us and we’ll let you know if it’s going to work for you.