Wondering if you should refinance a mortgage? Is your current home loan not up to scratch? Looking for a better rate? Or do you want to unlock equity? Then refinancing could be for you. But there are some important questions to ask first.
If you’re considering refinancing your mortgage, you’re not alone.
With the rising cost of living and interest rates hitting the hip pockets of many Australians, it’s a popular move.
According to ABS data, November 2022 saw refinancing values reach a record high of $13.4 billion.
Refinancing may offer you opportunities to unlock equity, land a better rate and avoid what’s known as “loyalty tax”. Sticking to the same loan could see you missing out on favourable rates and features lenders like to use to woo new customers.
Or maybe you’re about to come off a fixed loan period and are bracing for a potential rate hike.
Whatever your reasons for refinancing, we’ve got some questions to help you through the process.
What’s your financial picture?
Banks want to take a solid look at your financial profile before lending you a chunk of change. So check that your credit score is healthy to avoid disappointment.
Look at your budget to see how much you can afford to pay toward your mortgage.
Include interest, repayments, and service fees. And factor in possible additional refinancing costs such as application and valuation fees.
You can also consider how the length of your loan impacts your budget. A longer-term loan usually comes with lower repayments but more interest over the lifetime of your loan.
A shorter-term loan on the other hand would usually mean you make higher repayments now, but you could save on total interest payments.
Whichever way you’re leaning, we can help you crunch the numbers.
Do you have equity?
Having 20% equity in your home is typically a lender requirement when refinancing.
It’s the difference between the market value of your property and the balance of your mortgage. And with the recent decline in property values, it’s an important thing to check.
The 20% equity typically acts as a deposit. Not having 20% may mean you have to pay lenders’ mortgage insurance, which may make refinancing not worth your while.
And negative equity – when your mortgage balance exceeds your property’s value – would most likely put the brakes on refinancing plans.
But if you have additional equity you may be able to unlock it when refinancing.
Let’s look at an example – say your house is now worth $1 million. But you bought it for $800,000 a few years back with a $600,000 loan that you’ve paid down to $500,000.
Banks typically allow a loan for 80% of a property’s market value (depending on your financial position and other factors). So if you refinanced your $500,000 loan to an $800,000 loan, that could unlock $300,000 for things like reno projects or investments.
What are you looking for?
Now it’s time to think about what you want from a loan.
A better interest rate is usually top of the list. But what other features could benefit you?
An offset account may be something you want to reduce interest. Or the ability to make additional repayments without incurring penalties.
Depending on what you’re after, you may not need to move to another lender. We can always talk to your current lender first to see if they will come to the party.
If not, we can then explore your options further afield.
Questions you may have about refinancing a home loan
We’ve talked about what you should ask yourself if you’re considering refinancing your mortgage, but here are other questions you may have.
Is refinancing a loan a good idea?
When you refinance a home loan, you are replacing your existing mortgage with a new one, usually with different terms. This can include a lower interest rate, a different loan type, or a different loan term.
It can be a good idea if it helps you lower your monthly payments, save money on interest, or change the terms of your loan to better meet your financial goals. Just be aware that refinancing can also have disadvantages, so it’s important to weigh the pros and cons carefully before making a decision.
What are the disadvantages of refinancing a loan?
However, there are some disadvantages to refinancing a loan. One disadvantage is that it can cost money to refinance, such as closing costs, loan origination fees, and other expenses.
Another disadvantage is that it can extend the length of the loan, meaning you will end up paying more in interest over the life of the loan.
What will happen if I refinance a home loan?
If you refinance a mortgage, your old mortgage will be paid off and replaced with a new mortgage. The terms of the new mortgage can be different from the old mortgage, such as a lower interest rate or a longer loan term.
Does refinancing mean you get more money?
No, refinancing does not mean you get more money. In fact, you may need to pay closing costs and other expenses when you refinance, which can reduce the amount of money you have available.
Get in touch with Soho Home Loans
Want to refinance a mortgage to unlock a better interest rate, features and benefits, or equity in your home? Give Soho Home Loans a call.
We can help assess your situation to see what’s possible. And locate loans and lenders that are a great fit for you.
