The Pros and Cons of Refinancing Your Mortgage.
If you are considering refinancing your home loan in 2023 because of rising interest rates, this article will provide some insight into the various factors that you need to consider before making a final decision.
What is Home Loan Refinance?
Its when you change your loan for a new loan, usually either with the same lender or a new lender.
There are many reasons that you may wish to refinance your home loan, its not always about a better interest rate, but this often is the driver for most people.
Other reasons could be that you need extra cash out for home renovations, maybe you are putting in a pool, or doing cosmetic renovations.
New carpets, kitchen or bathroom are usually big-ticket items, and most people fund these with additional borrowing.
How Much Money Can You Save By Refinancing Your Home Loan?
It is difficult to give an exact amount of money you could save if you choose to refinance your home loan because it depends on various components like your current loan balance, your interest rate and the amount of time left on your loan, however, it is possible that you could save money by doing so.
For example, if you had a debt of $750,000 with a loan term of 27 years remaining and you managed to get a 0.5% decrease in interest rate, you could potentially save a total of $126,692 over the duration of the loan.
For the purpose of this example, I am taking the current interest rate of 5% and assuming the new rate to be 4.5%.
5 Potential Benefits of Refinancing Your Home Loan
- Potential lower interest rate: One of the possible significant benefits of refinancing your home loan is the potential to secure a lower interest rate, which may save you money on the interest payable over the life of your loan.
- Lower monthly payments: Refinancing could also allow you to reduce your monthly mortgage repayments by extending the loan term or through negotiating a lower interest rate.
- Debt consolidation: Refinancing may be a way to consolidate multiple high-interest debts into a single, more manageable monthly payment, which may make it easier to manage your repayments and potentially help you pay off your debts faster and with less interest.
- Change the loan terms: Refinancing could also allow you to change the terms of your loan, such as switching from a variable rate home loan to a fixed-rate home loan.
- Access to equity: If you have built up sufficient equity in your home, refinancing could allow you to access that equity in the form of cash, known as cash out. You could use this cash out for home improvements, a new car, debt consolidation, or any other worthwhile expense.
What Does It Cost to Refinance My Home Loan?
In addition to the possible discharge costs, there may also be break fees if you are on a fixed rate loan, state government fees associated with the discharge of the mortgage and registration of the new mortgage, as well as lender application fees and valuation fees.
There are a variety of potential outcomes, and so it may be sensible to consult with a professional to compare the solutions side-by-side and determine the best decision.
How Much Can You Borrow When Refinancing? Loan to Value (LVR) Ratio
When you are refinancing your loan, you may be able to borrow up to 90% of the loan to value ratio, however, you will probably incur lenders mortgage insurance as most lenders require this when you exceed 80% of the loan to value ratio.
Unless you have a very compelling reason to refinance over 80%, it may not be cost effective to do so, though there are some cases where it is unavoidable, for example, when a relationship breakdown forces one party to purchase the other.
Most of the time, if you’re just attempting to get a better deal, you won’t have to pay lenders mortgage insurance. However, as I mentioned previously, in certain cases, it may be too expensive to pay that insurance again.
For instance, a customer who wanted to refinance their home loan came to us and after we received the valuation from that particular lender, the loan to value ratio was approximately 87%. After careful calculation, we concluded that it would take 10 years before the customer would be able to start seeing any savings from this scenario.
After speaking with a second lender and obtaining a much higher valuation, we found that the loan to value ratio was 80%, meaning there was no lender’s mortgage insurance payable. The interest rate was 0.05% higher than the first lender, but due to the fact that the mortgage insurance payable would have been around $9000 and would have taken roughly 10 years to breakeven, the client decided to go with the second option.
Avoid Loans With High Fees
It should come as no surprise that it is ill-advised to take out a loan with an exorbitant fee, even if the interest rate is appealing. When the total cost of the loan is high, the low interest rate can become less attractive. Therefore, it is prudent to enlist the help of a qualified mortgage broker to compare a cost analysis of your current loan versus other options.
Comparison Rate – The True Costs Involved
The comparison rate is the true rate that you will pay, it includes all the fee’s and charges which are a cost to you, remember you don’t pay interest you make repayments, which include interest repayments and other fee’s and charges, such as switching fee’s and ongoing yearly or monthly fees.
When is a Good Time To Refinance My Home Loan?
The decision to refinance your home loan will be based on the purpose of why you are wanting to do so. Are you attempting to get a better interest rate on the loan you currently have outstanding? Are you considering refinancing for a different purpose, for example? Have you considered taking out cash from your home in order to acquire a new car, for instance, or are you looking into home renovations such as a new kitchen and bathroom or other non-structural changes?
No matter what, it is always a smart decision to have a home loan professional review your loan in order to decide if refinancing is the right option for you.
A professional mortgage broker will be able to assess your situation, do a detailed fact find and work out several mortgage options that will best suit your needs. They will be able to carry out a side-by-side cost analysis in order to compare and analyze the costs.
When You Should Not Refinance
Unless the savings from the interest rate decrease is of significant value, it may not be worth it to refinance your home loan, as there may not be any beneficial outcome from doing so.
When it comes to switching your home loan, it is possible that any savings you make may be taken up by the costs of the move. There may be costs associated with the discharge of the loan, government registration fees and other fees charged by the lender that will need to be taken into consideration.
In an effort to entice clients to switch lenders, some may offer cash backs as an incentive. However, it is always prudent to check if this move is truly beneficial, as the interest rates can be misleading and only a comparison of the total cost of the new loan with the existing loan can provide you with a complete understanding.
Having a cost benefit analysis done by a professional mortgage broker is the best way to get a full understanding of all the fees and charges associated with the loan, and they can compare it to your current loan. Depending on your situation, the savings could be immense, with potential savings of hundreds of thousands of dollars, or it could be more minimal. It is important to assess your current situation in order to make the best decision whether you should refinance your home loan or not.
What Happens When I Refinance My Home Loan?
When you are considering refinancing, you will need to get approval from the incoming lender by submitting an application, and this application will need to undergo an assessment process.
Once your loan is approved, the incoming lender will instruct their solicitors to prepare the loan documents for you to review and, if acceptable, sign and return.
There has been a shift in recent times to issuing loan documents electronically, however, there are some lenders who still use the paper-based version. Either way, the loan documents are always issued.
After having requested the discharge form from your current lender, your broker should be able to take care of the discharge procedure of your existing mortgage to the new lender. The current lender must complete the process within 21 days, but it usually takes less time.
The solicitors of the lenders will be in contact with each other in the settlement process, which involves the process of one lender paying out the loan to the other lender, and setting up the new loan with the incoming lender. You will then be responsible for making the repayments to the new lender.
Will I Pay Discharge Fees?
When you refinance a home loan you will in most cases have to pay a lenders discharge fee, plus you will have to pay state goverment registration and discharge of mortgage fee.
So depending on what the interest rates are with the new lender it may or may not be cost effective, if your fee’s to switch are say $800, but you will only save $800 per year it will take you 12 months to break even, only then will you start to save money.
Finally, if you are considering refinancing your home loan, it is important to take the time to carefully analyse your current situation and research your options.
Before taking any action, it is always a beneficial practice to carefully evaluate the advantages and disadvantages, and contemplate any potential risks that could be involved.
Many people are encouraged to look into the idea of refinancing when interest rates are increasing, as it could potentially result in long-term savings.
In certain cases, there may be no monetary advantage, or it might even leave you in a worse off state. Taking into account the potential implications of switching lenders, it may be wise to stay with your current lender.
Taking into consideration every factor, it is always recommended to speak with a professional mortgage broker who can review all available data to assist you to make the best decision regarding refinancing your home loan.
If you would like to discuss the particulars and specifics of your refinancing situation, please get in touch today by booking a Free Consultation.
We can provide you with the necessary advice and assistance to help you make an informed decision.
I assure you there will be no sales pitch.