It might have felt like just yesterday when you took out your first home loan, and had to deal with all the documentation stress. So with all that worrying and processing still fresh on your mind, why on earth would anyone want to go with refinancing? One major reason is to improve your mortgage deal.
In this article:
- What refinancing is and how it can save you money
- The main reasons you’d want to refinance
- How refinancing works
- The five steps to refinancing
- The pros and cons of refinancing
What is refinancing?
Refinancing refers to the process of taking out a new mortgage to pay for your existing loan, but under new conditions that either make your repayments lower, save you money over time or offer you extra banking benefits.
Why do people refinance?
Most individuals refinance when negotiating their loan terms will:
- Reduce their repayments
- Get a better deal by taking advantage of lower interest rates
- Consolidate their debt (by merging home loans with car or credit card loans etc)
- Release capital (equity) for spending – this means they can borrow more to renovate, invest, spend on a holiday or buy something they fancy
- Deal with a changed financial situation
How does it work?
When individuals refinance there are usually three changes that can be made to the loan amount itself. It can increase, decrease or stay the same. The choice to change the loan amount depends on why you’re refinancing and what you wish to achieve by changing your loan terms, and the process involves discussing your options with your broker and doing your research to ensure you’re getting a loan that suits your needs.
The typical refinance process, like applying for a home loan, requires you to understand your financial situations, have your credit history and documentation ready, and should involve a copious amount of research on your part.
Now depending on whether you decide to refinance by going to a lender yourself or use a broker will slightly change the process. If you decide to go through a broker, this is what the process might look like…
The five step process:
1. Figure out why you want to refinance. Are you trying to:
- Secure a lower interest rate?
- Borrow more money?
- Consolidate your debt?
Knowing your end goal will help finance experts offer you advice and information tailored to your needs.
2. Check your financial situation:
- Do you have your documentation ready?
- Is your credit score looking good?
- Are you able to service the loan based on your current financial situation?
- Do you have proof that you make repayments regularly on your current loan?
Making sure you can answer yes to these questions means that lenders would be more likely to help you refinance.
3. Do your research:
Spend some time talking to your current lender about whether or not they could offer you a better deal. If they can, hooray! You’ve saved yourself a whole bunch of internet scrolling… If not, then it’s time to start using comparison tools online, looking at the home loan products available to you.
4. Understand the costs of refinancing:
While refinancing can save you money, there are still fees involved in being discharged from your current lender and setting up a loan with your new lender. Calculating how much you’re likely to pay over the long run (or getting a broker like us to do that for you), can also make it clear if refinancing is the best option for you.
5. Proceed with your decision:
If you’ve done your research, talked to your lender, and are confident that refinancing is the best financial decision for you, let your broker know so that they can release you from your current lender and switch you to your new one. This process might seem a little lengthy, but compared to applying for your first home loan, it’ll be a kuch breezier process.
Still not sure if you should refinance? Check out the table below:
|Can reduce your loan term|
Able to take advantage of low interest rates
Negotiate your fixed and variable term rates
Lessen your monthly repayments
Can release equity for renovations or investments (which can better your overall financial situation)
|Prolong your mortgage|
You could have to pay exit or set up fees
Refinancing could be costly if your loan is already mature. Why? Because you’ll initially be paying more interest rather than principal at the beginning of your new loan.
Refinancing from a fixed to variable-rate loan could mean you pay more in interest over time
Releasing equity for unnecessary will increase your new loan balance.
To refinance or not to refinance?
As with any financial decision, whether or not you go ahead depends on your personal situation and what you hope to gain out of refinancing. The list above is only a summation of the main reasons individuals refinance, how the process works, and the benefits and drawbacks of negotiating your loan terms. If you would like to compare home loan products, discuss your situation with an experienced broker, or begin your refinancing journey, schedule a consultation with us here.
Disclaimer: The information provided is general in nature and does not constitute financial advice. Please speak to us for recommendations on your individual circumstance and requirements.