Question: When should you consider mortgage refinancing?
Answer: Whenever it makes financial sense to do so.
In the past, most people who took out a mortgage and spent 20 to 30 years working hard to pay it. Now with some many different finance products and finanace providers in the market, so these days people refinance their mortgage much more frequently. The average duration of a home loan in Australia now is just 4-5 years. Let's look at some of the reasons people in Australia choose to refinance their home loan.
1. Get a Lower Rate
Most commonly people refinance their mortgage to get a better deal. However the savings gained from that lower interest rate can be effected by the various fees and charges involved in exiting a loan agreement and mortgage and establishing new agreements.
This is particularly relevant when all or part of a loan is set at a fixed rate over a defined period of time. You need to be sure that in refinancing your home loan that you'll be better off in the long run after taking into ongoing account all costs.
All that being said, don't be put off. Talk to the lending institution or your mortgage broker and ask the questions about costs. Get the answers back in writing (emails are wonderful for this), make sure all costs are considered including mortgage discharge fees and mortgage stamp duty. Take out your calculator and do the math. The simple figure to remember is for every $100,000 borrowed, a 0.25% lower rate represents $250 per year in savings. So if your mortgage is $400,000 and the refinance offer is 0.25% rate less than your current rate then the saving will be $1,000. If all change over costs were $1,500 the n after a year and half the costs are covered by savings.
2. Better Product with Greater Flexibilty
"You never miss your water until the well runs dry". Many people only discover the full details about their mortgage when they want something the conditions prohibite. They try to do something and find either they can't do it, or they will incur a hefty charge if they do. Such as a redraw facility and offset accounts - the ability to pay extra money into a mortgage and then redraw it later. This feature is not possible with a basic home loan, so many people refinance their mortgage to give themselves this sort of increased flexibility.
3. Before and/or After Renovations
Renovations should do two things, cost money and add value. So it often makes sense to refinance your mortgage and take out a construction loan so you only pay interest as building progresses. Then once construction is over, it might make sense to refinance your home loan again so that you consolidate the total amount you owe into a loan that minimises your interest bill, while giving you a degree of liquidity whilst incorporating the value added to the property by the renovation.
4. Accessing Home Equity
In recent times the property market has appreciated at a significant rate. e.g. a home you bought for $300,000 five years ago, might now be worth $500,000. In this situation, refinancing with a home equity loan would realise that extra $200,000 equity. With right product access to that equity could be used for investment purposes or to consolidate other personal loans at the cheap rate that a mortgage loan provides.
5. Reduce Mortgage Stress
For one reason or another, people find their financial circumstances change and realise they have borrowed more than they can comfortably repay, which means they're in danger of defaulting.
Refinancing with a longer term or better rate can make minimum repayments more manageable. There's no shame in is, so don't suffer in unnecessarily. If you're having trouble making your mortgage repayments, talk to lender or broker about your options.
6. One Dumb Reason - Too Much Discretionary Spending
All of the above reasons make financial sense. Many are about using the equity built up in your property to lower lending costs, some are about using the equity on sound investments like rental properties or low risk share purchases. Often lenders provide what is virtually a 'line of credit' and the temptation is to use that credit, which is on the equity in your property, for what I call 'lollies' - things like expensive holidays and vehicles or to use it to pay off credit cards maxed out on smaller multiple discretionary items like clothing or dinners out.
With this kind of lending facility there is a large amount of self-discipline required. Regular review of your status, accounts with limits and a desire to increase your real worth are required, otherwise the gain made by investing in property can be lost to impulsive spending.