7 Key Elements of Refinancing
We are currently seeing an increased activity in refinance queries which is understandable given the amount of current special offers by home loan lenders, particularly for owner-occupier purposes.
If you’ve only taken out a home loan in the past couple of years, refinancing is probably far from your mind right now. Most people have a set-and-forget attitude to their home loan, which is not ideal and can cost you.
If you take out a home loan and leave it unchanged for its entire term, this may result in substantial extra interest that you’ll pay to the bank, plus you’ll miss out on opportunities to make money by not utilising the equity you have built up in your property.
Here are 7 reasons why you might want to consider refinancing:
1. Get a better home loan deal
Banks are in business to lend money and winning “new” customers is their number one priority. There will always be “special offers” to attract new home loan customers, however I am yet to meet a single person who has ever received a phone call from their bank and be told that their home loan rate is being reduced for no apparent reason!
2. Reduce your home loan repayment amount
If you want to free up cashflow for any purpose, then refinancing is a very powerful strategy. A lower interest rate will result in lower repayments. As well as resetting the loan-term means that the amortisation period starts from zero again which means your repayments will be lower.
3. Access equity and leverage into other investments
The most powerful strategy to create wealth is to use other people’s money. When you borrow against the equity in your home, you are effectively using the banks money (secured against your home) to tap into new investment opportunities. By releasing the equity in your home, you don’t need to wait to save a deposit for the investment property you want to purchase.
4. Renovate or extend your home
You have outgrown your family home, but you love the area, the kids are settled at school, and you love living close to your best friends. Why move? If you have built up equity in your home and you have the room, then extending your home or renovating is a sensible strategy. Whilst the cost may seem daunting, you’re likely to change your mind once you add up the cost of selling your home, plus having to pay the stamp duty again for the new home.
5. Consolidate unsecured debts
Not all debt is the same, there is good debt, bad debt, and ugly debt. Ugly debt is usually very expensive as it’s used to buy toys, holidays, and lifestyle purchases. Rather than make repayments on a personal loan or credit card, why not consolidate the debt into your home loan and significantly reduce your overall loan repayments. Unsecured debt is much more expensive and comes with a very high interest rate, plus the repayments are usually high as the loan term is usually much shorter.
6. Fix your interest rate for certainty of repayments
Interest rates are at historical low levels and they’re expected to remain low for some time. A large percentage of home loan customers end up worse off when fixing the interest rate, however there comes a time in your life when certainty plays a big part of your strategy and “locking-in” your loan repayments (commitments) becomes of utmost importance to you.
7. Increase your borrowing capacity
When refinancing you are effectively resetting the loan term. This usually means that your new home loan repayments are lower and therefore your borrowing capacity is higher. Furthermore, not all lenders play by the same rules. Some lenders have a stronger appetitive to lend you more money and therefore by refinancing you move your lending to the bank that is willing to help you achieve your bigger picture sooner.
If you are not refinancing at least every 3 to 4 years, there’s a good chance you will fall behind financially for some or all of the reasons outlined above.
If your home or investment loan hasn’t been reviewed for a few years, now is the perfect time to request a home loan health check to ensure your longer term financial goals are on track. Contact us for a confidential chat.