Why a loan refinance may be a good idea
There are many reasons why a refinance may be a good idea and it is not just about looking for the lowest interest rate.
Refinancing to get a better interest rate
The main reason for refinance is to get a lower interest rate.
When comparing the interest rates you should also take into account the revert interest rate, application fees, annual fees.
Refinancing to reduce your repayments
If your loan is principal & interest repayments, by choosing to extend out your loan term your required repayments will be less than your current loan ( that is even before you consider the lower interest rate)
Consider the overall interest over the life of the loan if you take the new full loan term to pay down your loan. The total interest you will pay if you take the longer term to pay down the loan will be most likely be higher.
Refinancing to access equity in the property to consolidate your debts
Maybe you find managing lots of different repayments frustrating.
You won’t be on your own.
It is not uncommon for households to have mortgage repayments, personal loans and credit card repayments to manage at the same time.
If you add up the interest you are paying across all of your debts – you may find there is an alternative.
By accessing the equity in your property, you can consolidate the debts into a single loan.
As part of a refinance, you may be taking short term debt options and extending to 30 year loan terms. If this is the case consider the total interest you are paying on those loan balances if you really take 30 years to pay them down.
If you can pay extra into the loans to pay them down faster this will save you interest costs over time.
Refinancing to change the applicable interest rate: investment to owner occupied
Most lenders charge an interest rate based on the loan purpose.
This means they are asking what you plan to use the loan monies for : your own home or as an investment.
If life changes and you are moving back into your property you can access interest savings by moving to an owner occupied home loan rate.
Moving into your investment property
If you are going to live in your current investment property you are eligible for owner occupied interest rates.
Now may be the time to review all the lending options.
Refinancing if you have enough equity in your own home to use a security for some or all of your investment loan
Some lenders apply interest rates based on the security being offered – not the loan purpose.
If you have enough equity in your own home, this can give you a potential interest savings boost, as lenders price owner occupied home loans lower than investment loans.
To keep it simple for tax reporting make sure you have a separate loan account for the investment portion of the loan.
Take into consideration the costs that are part of a refinance and balance this against the potential interest savings
Compare the fees and charges
Fixed Rate Loan ; are there any penalties to end the loan early?
Discharge or termination fees from your current lender
Application Fee for the new lender
Annual Fees for the new lender
Switching Fee if you stay with your current lender and just make a change to your current loan
Government charges eg mortgage registration fees
Questions to ask as you consider your new lending needs
Loan Term
Do you want the new loan to be 30 years again, or just the years left on your current loan
Principal & Interest vs Interest Only
Your requirements for repayments may have changed over time
Fixed Rate vs Variable Rate
Maybe you need more certainty in repayments, or perhaps you know in the medium the loan term you may need to change the loan and do not want the risk of fixed rate penalties.
Do you need a split loan
Do you need offset accounts
Taking the time at the beginning of the process gives you time to work through your lending requirements for the refinance.