Why and when to refinance?

Contract Paper

Understand Refinancing

The mortgage industry has an ever-fluctuating market. You can never rely permanently on any debit or credit transactions you have made here. When it comes to your home loan, it is a must to always be aware of the existing climate in the mortgage industry, if you want to save yourself a lot of money. Even if you chose a perfect home loan scheme for yourself a few years ago, it might have gone out of sync in the existing market today. So, if your mortgage no longer suits your lifestyle, you should think about seeking a mortgage that does. This is why ‘Refinance’ is necessary.
In basic terms, refinancing is all about substituting/renewing your existing debt obligation with another debt obligation under different terms. The terms and conditions as well as the policies of refinancing usually vary widely from country to country or by states and provinces based on the economic factors such as inherent risk, projected risk, political stability of a nation, currency stability, banking regulations, borrower's creditworthiness and credit rating of a nation.

Why should you opt for Refinancing?

Refinancing not only allows you to change your loan interest rates but also rewrite your current mortgage with another lender. Generally, borrowers decide to refinance when they want to:

  • Secure themselves with a lower interest rate
  • Repay the mortgage faster
  • Take advantage of various loan features and mortgage structures offered by other lenders

In simple terms, refinancing helps you sync your lifestyle with your financial situation.

As a Borrower, you always have a choice to refinance with your existing lender or choose an alternative one. If you make a decision to choose an alternative lender, your new lender will pay out your existing home loan, and you will commence making repayments to the new lender. Besides the three significant factors mentioned above, the benefits of refinancing cover a broader range. Depending upon your level of priorities, refinancing can benefit you in various ways that include:

  • Getting a mortgage with a lower/competitive interest rate
  • When interest rates drop, refinancing supports you in shortening the term of your mortgage and paying significantly less.
  • Switching from an adjustable-rate mortgage to a fixed-rate mortgage, or vice versa as per the market requirements
  • Getting access to equity and investing the money somewhere else for a long-run benefit
  • Fixing all your past credit issues

As mentioned earlier, you must always correspond with the existing market but more than that you need to know where you stand. There are certain cases where refinancing would not benefit you much. Before you decide to refinance, you must evaluate your financial situation and your plans/goals over the next few years. Rather than flowing yourself along the stream of the advantages of refinancing, you must understand what your priorities are and how your financial condition is helping it.

Before you jump to a conclusion, always check:

  • If the interest rate and fee structure are competitive or not?
  • If you are satisfied with the user-interface and services provided by your current lender or not?
  • If you can access equity and use it for some meaningful purpose while being with your current lender or not?
  • If your current home loan debt obligation is relatively flexible or not?
  • If refinancing could help you get a better backend support and service or not?

When is it best to Refinance?

  • 1. If you want to save yourself a huge amount of money by lowering your interest rates and reducing the monthly repayments:
  • This is the prevalent reason why most of the borrowers choose to refinance. You, me and every one of us looks for a good and at the same time a cheaper home loan ~ Loan that charges you fewer interest rates and with better features. Having a lower interest rate, even by a penny, can save you thousands of dollars in the long run.
    For instance, if you have borrowed $300,000 at an interest rate of 4%, your monthly repayment would be $1,584 and over a time span of 25 years, you’d be paying $475,200 as your total loan cost.
    But, if your interest rate was only 0.5% lower i.e. 3.5%, you’d be paying $1502 as your monthly repayment and over the time span of 25 years, you’d be paying $450,600.
    So you can see that a 0.5% lower interest can save you $24,600.
    If you have been finding your mortgage tough enough to keep up with your financial status, it is high time to switch to a mortgage with a lower interest rate. And you always need to be smart enough to evaluate what suits you the best.

  • 2. Consolidating all your debts :
  • Money management is quite a hectic task, and when it comes to debts it is stressful too. However, having an option where you can have all your debts combined into a single repayment could be extremely helpful for you. You won’t be juggling with a number of bills, and get hit with fees for all your separate debt obligations. Home loans usually charge a very low-interest rate in comparison to other forms of debt. So, if you are having trouble with managing many debts, it might be time for you to refinance and consolidate them.
    Refinancing to consolidate debts certainly has a correct and a wrong way to go for it. The best option is to seek the direction of your trusted mortgage Broker who will discuss the option to reduce the interest rate payable on your consumer debt through refinancing your home loan. A mortgage broker will be able to demonstrate the savings through calculated simulation, so you will know where you stand if you choose to proceed.

    So, how can you qualify for better interest rates when consolidating debts?

    • To borrow up to 90% of the property value, you must possess a clean credit history in all your debts with timely repayments on all.
    • To borrow up to 80% of the property value, you must possess a clean record of timely repayments on all your debts, in the last 6 months.

    You will be able to borrow only less than 75% of the property value if your credit history shows some serious decline in one or more debts you have.

  • 3. If you want to maximize the available equity :
  • A home equity loan is essentially a one-time consumer loan using your home as collateral. Mathematically, Equity is the difference between the amount you owe your lenders on your home loan and its market value.
    For example, if your home is worth $1,000,000 and you have $700,000 remaining on the loan, your home equity is equal to $300,000.
    If your home is worth more than what you owe on it, you’ll have an access to equity and be able to use it to borrow money. You can use this money to make home improvements, fulfill education expenses, buy a new property, invest or accomplish your personal priorities without having financial issues. Moreover, equity loans offer lower interest rates and this is the reason why most borrowers find equity affordable and choose to unlock access to it.
    Refinancing helps you to maximize the available equity as your existing interest rate fluctuates.

  • 4. If you want to enjoy the potential TAX benefits:
  • As you might have already known by now, refinancing your home mortgage at a lower interest rate can save you a significant amount of money each month, yet it helps you save some money on your taxes too, by deducting a few costs you incur during the refinance. Deducible costs include mortgage interest, points and property taxes paid during the closing. However, we highly recommend you to seek correct guidance from an experienced tax professional to know about the allowable deductions you qualify to.

  • 5. Getting your finances back on track:
  • Having rough patches on your finances can land you on an ordeal. There are a number of situations that can lead you to the path of financial insecurity. However, with correct guidance and proper decision making, refinancing can help you get your finances secured.

    1. If you have a bad credit home loan

    If your original mortgage was with a specialist lender for people with bad credit, it is highly likely that you have been paying more. If you’ve been in your current specialist home loan for a few years and you have kept up with all your regular repayments, you may be able to refinance into a standard home loan for a comparatively much lower rate. To qualify in switching to a standard home loan from a bad credit loan:

    • You must have to build enough equity to owe 80% or less of your property’s value
    • You have to have all your defaults paid and they must no longer appear on your credit file. Remember that a mortgage default can remain intact on your credit file for up to 5 years.
    • You must provide your full income evidence
    • You must have a regular debt repayment history for the last 6 months

    Bad credit home loan is not a permanent solution. They are there to help you set yourself back to having a good credit history. If you have been diligently managing your finances with your bad credit loan for some time, it might be time for you to refinance.

    2. If your mortgage is in arrears

    If your mortgage repayments are delayed, you might be in arrears. Being in arrears is a serious issue if not solved timely, you might even lose your property. One better solution out of this is refinancing. If you find yourself being in arrears, you should consult with your broker and refinance to a specialist lender for a temporary duration. Odds are that you will be paying higher interest rates while being with the specialist lenders. However, this will help you set yourself back to normal so that you can keep up with your financial commitments. But remember that once you are confident about your financial security, it is better to switch back to a standard home loan.

  • 6. Services and additional features offered by the lenders
  • If your current mortgage does not satisfy you much with its available features and the rates, you should start looking for a new one. Moreover, if your loan period is long, a home loan with better features is always worth the refinance cost.
    Usually, mortgages with lower interest rates offer much fewer features than the ones with many features and add-ons. As a borrower, you need to make sure that the mortgage suits your needs, before enticing over a cheaper home loan.
    Generally, the additional features offered by the lenders include:

  • Offset account:
  • An offset account is one of the most useful mortgage features available, offered by many lenders (except a few of those with heavily discounted interest rates). An offset account allows you to have your loan account and savings/personal bank account interlinked. Why is it benefiting? Every dollar you store in your offset account will reduce your loan principal as long as it's there. An offset account is like a bank account, but instead of earning interest for you, it reduces the interest you pay on your mortgage.

  • Flexible repayments:
  • Most of the variable rate home loan lenders allow you to make extra repayments at zero additional cost so that you can pay the loan off faster.

  • Cash-bank Offer:
  • Some lenders even offer a cash back feature if you refinance with them. The cash bonus facility has certain criteria that vary from lenders to lenders. Always seek a consultation from an experienced mortgage broker, to know which offer will be the best for you. Even though this feature is an attractive offer, you must evaluate your priority and decide whether it would benefit you in the long-run or not.

  • Repayment holiday:
  • It allows you to take a break from making repayments for a temporary duration of time (usually not more than 6 months). Some lenders compensate for your break period with the additional repayments you have made earlier. You must qualify to the criteria allocated by the lenders, the repayment holiday period is different according to the cases, lenders generally consider a longer repayment holiday period for borrowers who have been affected by COVID-19 financially or physically or have lost their jobs or reduced the working hours due to the unforeseen circumstances.

  • Redraw facility:
  • A redraw facility allows you to withdraw any additional repayments that you have already made. Usually, borrowers redraw money to financially rectify your unplanned expenses. However, the usage of this money has been restricted to certain areas only such as renovations, holiday trips, education or to buy yourself anything such as a car, you will be restricted to use this money for business purposes.

  • Flexible rate options:
  • This feature allows you to divide your total rate into fixed and variable parts as per your requirement.

    If you feel that these features offered by the lenders suit your needs, you definitely need to go for it. Yet, before making any decision always keep in mind that your priorities must sync with your financial decisions.
    As of now, you might have known when should you refinance, but with that let us talk about

When not to refinance?

There are conditions where refinancing can be a very bad idea, let us look at a few of them:

  • If you have a fixed-rate home loan
  • Think twice before refinancing out of a fixed-rate mortgage. A fixed-rate mortgage allows you to make your repayments at the same rates, and while the market rates peak up to the top you will be paying less than every other variable rate loan borrower. However, the downturn in rates might be a loss for you.

  • If your new lender doesn’t offer the service you need
  • Customer service is one of the major aspects that lenders hold. As a borrower going through a lot of money transactions, you will be having heaps of questions to ask. Having friendly support from your lender is always a plus point in making your mortgage journey smooth. If your current lender has better customer service than the one you are thinking of refinancing to, you might need to think twice.

  • If your new home loan doesn’t have the features you need
  • As discussed earlier, low-rate home loans can offer highly discounted interest rates that can be pretty intriguing to you but they lack features. It is completely your call to choose what is best for you.

  • If the new loan has high fees
  • Besides the loan amount you owe to your lenders, you’ll be going past many processing fees that include an application fee, settlement fee, valuation fee, LMI and stamp duty. If your current lender charges lesser fees than the new one, you must think twice before opting to refinance.

Refinancing needs a lot of consultation, research and a smart move. At Capkon we not only support our clients through their home ownership journey but also help them make smart and better money decisions. If you are planning to Refinance, CONSULT with one of our experienced mortgage experts before you make your move, they will guide you through and help you know what profits you the best.

Author:

Kiran Thapa

Ojashwi Sharma

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