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When to refinance your mortgage?

When you originally set up your mortgage, it would have been subject to the floating and fixed lending rates for that particular day, with your specific bank. But things change over the years. It could be time for a re-look, with a view to saving some interest or improving your financial flexibility.

Why would you want to refinance your mortgage?

Refinancing your mortgage takes research, time and money. So why do it?

  1. Your financial situation has changed
  2. Mortgage interest rates at your bank have changed
  3. Mortgage interest rates at a different bank are better than yours

Reason 1: Your financial situation has changed

Perhaps you got a bonus, won Lotto or need to help your child with uni tuition fees. Or maybe you got married or divorced, had a baby or experienced some other kind of life-changing event. Given the length of a mortgage, it’s almost a certainty that your financial position will change over the duration of your repayments.

Refinancing your mortgage may give you a chance to consolidate other loans or tailor your regular repayments over a longer or shorter period of time. Refinancing might also let you borrow more or take advantage of lower interest rates.

Reason 2: Mortgage interest rates at your bank have changed

There are two types of interest rates on a mortgage that you can allocate your mortgage loan across.

Floating rate – this rate will readjust periodically and be applied to the outstanding balance of your loan. The rate change is determined by the wider market interest rates. While this type of variable rate may seem attractive when the rate is low, there is always the risk that the rate will fluctuate and end up higher.

Pros and cons of a floating rate:

  • You have the flexibility to make lump sum deposits without additional fees
  • If you continue to pay at a consistent rate when the interest rates drop, you can repay your loan more quickly
  • High rates could impact your available cash flow

Fixed rate – you can set the number of months you want to keep paying the same fixed rate. This offers you the stability of knowing exactly what your repayments will be and removes the risk of your repayments suddenly increasing.

Pros and cons of a fixed rate:

  • Your interest repayments will remain consistent for the length of your fixed term
  • The risk of rates increasing is removed
  • The benefit of rates decreasing is removed
  • Lump sum early repayments will usually incur fees

You can choose to refinance your loan from your initial setup to take advantage of improved interest rates. You can also change your allocation of fixed and floating to match your circumstances. Or it could be that your fixed rate loan has completed and you want to take on another fixed rate. These are all valid reasons for refinancing.

Reason 3: Mortgage interest rates at a different bank are better than yours

Perhaps your fixed rate term has completed and another bank has more favourable interest rates or is offering you an incentive that you want to take advantage of. It pays to re-evaluate your finances periodically to ensure you’re getting the best deal for you. However, you need to consider the costs involved in refinancing your mortgage.

The costs of refinancing your mortgage

Refinancing a mortgage usually involves a number of costs. While another bank may be wooing you, or new interest rates look very tempting, there are fees to consider:

  • Legal fees
  • House revaluation fees
  • Break fees from your current loan
  • Returning of any rewards obtained from your current loan

Use a mortgage calculator to assist your research

A mortgage calculator can help you assess what repayments could look like by offering you a range of inputs. Typically, you will be asked to provide the loan value and a regular repayment amount. Filters allowing you to select from interest rates and the term of your loan will then calculate the interest costs over the course of the loan. Tweak these inputs and filters to find the combination that works for you.

When using a mortgage calculator, be aware that it won’t show you the costs involved with refinancing.

Mortgage Repayments Calculator

The million dollar question: how much each month?

Mortgage Repayments Calculator

The million dollar question: how much each month?

Applying for your mortgage refinancing

Your application is likely to require proof of your income, assets and employment, as well as answers to basic mortgage questions. A property valuation may also be needed.

The benefits of consulting a mortgage broker

There’s a lot involved when deciding whether to refinance your mortgage. It may pay to consult with a mortgage expert to identify your best option.

Mortgage brokers understand the mortgage application criteria, processes and interest rates of different lenders. They can help you identify the best loan for you and assist you through the application. Potentially, they can find you an option even if a major lender says no. Mortgage brokers are now required to be registered financial advisers and have a complaints process with a dispute resolution scheme, keeping you safe from bad advice.

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