Home Loans

What is Home Loan Refinancing?

Mortgage refinancing has become an extremely popular way for mortgage borrowers to save on their monthly repayments and to switch to more favourable terms with another mortgage company.

Mortgage refinancing is a competitive market and a borrower who does their homework can take advantage of the many offers in the marketplace. The best mortgage for your needs today may not be the mortgage you have at present.

How Does it Work?

A mortgage refinancing exercise gives you the ability to change your home loan to suit your changed needs and to take advantage of better opportunities. Refinancing lets you change your home loan to suit your new circumstances. The new provider or the new loan will discharge the existing mortgage and generally apply any existing security to the new loan.

What Type of Things do People Refinance for?

There will be a number of circumstances that may arise that can prompt a search for a better solution to your (changed) needs:

• You may want to examine mortgage refinancing to renovate your home.
• You may be seeking to pay off your debts quicker.
• You may simply want to lower your monthly repayment plan.
• You could be looking to raise cash for a purchase such as a car.

A home loan comparison - a home loan ‘health check’ – will help you assess the pay-out costs on your existing loan – and may result in the opportunity to cut your repayments drastically, even freeing up cash to improve your home.

The best mortgage for you under your changed circumstances may involve switching to another mortgage provider. There is no ‘betrayal’ factor here. It is common and indeed, it becoming far more frequent than it has been at any time hitherto. Anecdotal evidence suggests that up to 25% of all home mortgages are people switching from one provider to another.

Is This a Good Time to Refinance?

This is a good time for refinancing because the volumes of new loans has fallen significantly this year and lenders are looking to maintain their loan books at record levels. The banks in particular are actively offering existing customers refinancing deals and mortgage brokers are keen to do deals in this highly competitive market. As the Reserve Bank raises interest rates so too do conditions for lenders get tougher as each interest rate rise tends to warn off new home buyers.

Should I Refinance When Rates Go Up or When They Go Down?

The opportunity to refinance is optimal when rates are rising as the potential for differentials between the lenders is increased. This is often related to the success of the banks in raising money via their deposit marketing and often will create opportunities for refinancing deals to be done in the midst of a competitive battle for deposit funds.

Fixed Rate vs Variable Rate?

There are no hard and fast rules for fixed rate home loans – just common sense rules. There are some essential factors to consider when considering a fixed rate loan:

• Fixed rate loans are ideal for investors who want certainty about how much their repayments are.
• Fixed rate loans are ideal when interest rates are historically low.

In the case of an investor who is looking for a return on his investment, the certainty of a fixed rate loan is desirable. Think about it: you are borrowing hundreds of thousands of dollars in an environment where interest rates have moved up more than 3.5 percentage points in some cases. On a standard variable loan (non fixed rate) of $400,000, that could mean a difference of $14,000 a year! That could be enough to create serious cash flow issues and may in fact force the investor to sell. You don’t want that situation to occur!

Investors are in a different category to home buyers. Investors are ideal users of fixed rate loans especially at a time of low interest rates especially highly geared buyers who need to protect themselves from rate rises. Investors like the certainty of outgoings as they are looking at the retune on investment and the total performance of the investment.

Consolidating Other Debt Into a New Refinanced Home Loan

Loan consolidation has become a tool for home borrowers to, in a nutshell, reduce the amount of money going into loan repayments. By consolidating a number of loans such as credit cards and personal loans into the one loan – the principal home mortgage – a borrower can significantly reduce their monthly repayments. A mortgage broker can assist in the application for mortgage refinancing.