May 01, 2013
Refinancing can make your mortgage easier to live with, but be sure to balance the pluses with the pitfalls.
Today's mortgage market is brimming with choice. In an environment of higher interest rates and intense competition between lenders it pays to put refinancing on your agenda. Refinancing generally refers to the process of replacing your existing loan with a new loan from the same or a different lender. This may involve some fresh paperwork and loan applications but the rewards can be worthwhile.
It makes good financial sense to check if your existing home loan offers a competitive interest rate, charges minimal fees and offers useful and value-for-money features suited to your lifestyle and needs.
According to the Mortgage Choice 2010 Refinancers Survey, 68% of Australians who refinanced their home loan in the last 12 months saw their interest rate drop. Of these, almost one quarter (23%) were now saving more than $300 per month while close to nine in every 10 (88%) were saving more than $50 per month.
Let’s look at an example of savings that can be made. Refinancing a mortgage balance of $300,000 over 25 years at a 7% interest rate to one charging 6.7% interest could reduce your monthly repayments by around $57 and slash up to around $17,100 off the total interest owed.
The downside to refinancing is that it can involve new costs. Many lenders impose ‘exit’ fees, typically payable if you bail out of the loan within the first five years. These charges can be substantial, particularly if you refinance a fixed rate loan before the fixed term expires. You may also face fees and charges when taking out the new loan. The key is to crunch the numbers - or ask your broker to do it for you, to check that the benefits outweigh the costs.
That said, cost savings are not always the key driver behind refinancing decisions.
The Mortgage Choice 2010 Refinancers Survey also found that although the main motivation was to switch to a cheaper loan (24% of respondents), others were keen to consolidate debts (11%) or to fund a renovation (10%).
Having access to extra loan features like interest offset or redraw facility can also make refinancing worthwhile.
If you're unsure whether refinancing is right for you, call your local Mortgage Choice broker, Irene Cujko on 02 9674 8014 to arrange a free home loan health check. They can help determine if your loan is still competitive and meeting your needs, or if you could get a better deal by refinancing.