Refinancing Your Mortgage: Don't be a moth
The lure of lower interest rates is like moths being drawn to the light. Make sure you’re not heading for a bug zapper or you could end up getting a shock!
There has been plenty of noise in the media about record low interest rates and renewed competition from some of the banks and non bank lenders offering some excellent rates which can be very tempting.
The huge exit fees on home loans and property investment loans have been abolished by the government making it more appealing to switch banks, with the exception of fixed rate loans.
Fixed rate loans still carry break costs, which can run into the tens of thousands of dollars in some cases (the worst I have seen was just over $36,000).
As with anything involving money you need to do your research to gather the facts before you can make an informed decision and refinancing your home loan or investment loan is no exception. There is no point going through the extra paperwork and the time it takes to refinance if there aren't any long-term benefits or the interest savings are minuscule.
Some reasons to refinance:
Lower interest rate
This is probably the most common reason for property owners to look at refinancing and in some cases this is the only reason mortgage holders refinance.
You just need to be sure that the proposed savings on loan repayments are actually going to be worth it. Sometimes the savings can look impressive on the surface but upon deeper investigation you can be worse off.
For example, if you only have 15 years left on your existing loan and your bank or broker refinances you into a 25 or 30 year loan, your repayments will definitely be reduced. The bank will do very nicely out of this transaction but you will most likely be worse off in the long run.
Fixed Rate Loans
Many home owners will refinance to get themselves into a fixed rate loan but you need to be aware that you don't necessarily need to change lenders to secure a fixed rate. Having said that, you may find better fixed rates outside your current lender.
A word of caution, before you race out and lock into a fixed rate loan make sure to check out our Fixed Rate Checklist as it may help you avoid some unexpected grief, particularly if you are considering buying an investment property.
Another reason you may wish to refinance is to bundle your various smaller loans such as personal loans, car loans, furniture loans, credit card debt into your home loan.
By consolidating multiple loans into one loan you replace multiple loan repayments with one simple repayment which can make life easier in the short term.
A word of caution here though, as rolling your car loan into a 30 year home loan means you will still be paying it off long after your car has landed in the scrap yard.
You need to seriously consider increasing your home loan repayments to pay off the car loan component in say 3 to 5 years instead of 30 years or you will slowly go backwards.
Chasing the benefits of extra home loan features can be another reason to refinance. For example you may find that a 100 per cent offset account for your mortgage is a good idea and maybe your current loan product does not offer the benefits of an offset account.
You may be one of the many Australians that have a home and/or investment property that has increased in value significantly since you purchased it, which means it could have a lot of equity available.
This is what we call Lazy Equity, as it is doing nothing for you and your future. For those that have sufficient income an excellent strategy can be to release the equity from your home and use it to purchase an investment property or multiple investment properties.
Looking for an interest only loan is another possible reason to refinance. If you are upsizing to another home and wanting to keep your existing home as an investment property then your property adviser or accountant will be encouraging you to switch over to an interest only loan as principal payments are not tax deductible.
Whatever your reason for thinking about refinancing your mortgage, you need to remember that this decision should not be taken lightly as there are many pitfalls for the unwary.
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- Fixed Rate Checklist
- Interest Rates: To Fix or Not to Fix
- 27 Questions To Ask Your Mortgage Broker
- Buying An Investment Property Checklist
About Darryl Simms
Darryl Simms specialises in helping individuals invest in property for less than a latte a day, reduce their tax and create enjoyable lifestyles.
Latte Property has a large following of successful property investors who have enjoyed professional guidance in the purchase of quality new apartments, new townhouses and new homes.
Darryl is also the Author of “50 Must Know Property Investing Tips” and is currently busy writing his next Property Investment publication.
Darryl’s favourite quote is:
“Try not to become a man of success, but rather try to become a man of value” – Albert Einstein
Contact Darryl at www.latteproperty.com.au/ask-darryl