Key Benefits and Risks of Refinancing Your Mortgage

March 2, 2018


Wondering if you should refinance? What are the real benefits and risks of refinancing? Why are so many Australians scrambling to switch to a new mortgage in 2018?

While there are plenty of worthwhile reasons to go through the refinancing process, the top advantage that motivates most homeowners is to simply get a better deal on their mortgage by switching to a lower rate. With the official cash rate continuing to hover at its low of 1.5%, many homeowners are opting to take advantage of the benefits of refinancing now before the rates do go up again.

The last change was in August of 2016 when the Reserve Bank of Australia moved the cash rate down by .25 percentage points to 1.5%. With low inflation and steady wages, the RBA isn’t expected to raise the cash rate just yet. And, with the Aussie housing market finally starting to cool down, experts aren’t predicting the rate to jump back to 1.75% until, at least, the end of 2018, or possibly within the first half of 2019 when the economy is expected to start to pick up again.

What this means for mortgages is, if you are thinking of refinancing, you may want to consider switching to a lower rate sooner rather than later. If you hold off another year or two, rates aren’t likely to be as competitive.

With a slowdown in the real estate market, banks and non-bank lenders are seeing fewer new mortgages, which means they may be more willing to make refinancing an attractive option for homeowners.

Now, before jumping in and switching to a new loan, it’s important to a take step back and evaluate the benefits and risks. What do you hope to achieve by refinancing? Is it worth it for you to switch home loans right now?

Here’s the thing. Not everyone will come out on top if they get a new loan. However, many people can benefit if they take the time to explore their options and understand what is involved with replacing their original mortgage.

Here is a look at some of the rewards and risks.

The Benefits of Refinancing


A Better Interest Rate

One of the reasons you are making large payments now is because of your present interest rate. Get a lower rate and you will also pay less interest, which means less debt. Switching to a loan with even a half of a percentage point reduction could save you thousands – to tens of thousands – over the course of a 20 or 30-year mortgage.



Flexible Features

You may be able to save a lot of money and pay down your mortgage faster by switching to a loan with flexible features like a free 100% offset account and unlimited free early repayments, especially if your income has increased since you first took out your loan. With an offset account you can use your savings or extra income to reduce accrued interest.



A Lower Payment

Perhaps the greatest benefit of refinancing is that many homeowners will be able to reduce their monthly mortgage repayments. This depends on the mortgage terms, but it could also reduce the amount of overall interest to be paid over the remaining life of the mortgage.



Security of a Fixed Rate Loan

Another very good reason to refinance is that it can give you a predictable mortgage payment each month. With an adjustable rate mortgage, you really are at the mercy of the economy. You can break that trend and enjoy the benefits of predictable repayments and confident budgeting with a fixed rate loan, letting you sleep more soundly at night.



Pay Off the Mortgage Sooner

When getting a new loan to replace your current one, another one of the benefits of refinancing is that you could shorten your mortgage term. This means that instead of paying for another 30 years, you could reduce it to a 15-year mortgage if you could handle the payments. Your payments will become larger but you would have to pay less overall.


The Risks of Refinancing


More Fees

If you are not careful, instead of receiving some of the rewards of refinancing, it is possible that you may regret doing it. This is likely to be a problem if you don’t have a good credit score or if you fail to investigate the terms of the mortgage carefully beforehand. Both are absolutely essential to getting the mortgage you really want.



Lenders Mortgage Insurance

These very unpleasant words can ruin your day if you were not expecting it. Having to pay Lenders Mortgage Insurance (LMI) is the exact opposite of the financial relief you expected and hoped for when you applied for the new loan. Even if you had enough equity in your home recently, a drop in your home’s value can just about take it away. Find out the value of your home before applying to be sure you will be able to avoid adding the expense of LMI.



Exit Fees

Closing out your old loan may have some surprises. Some loans come with extra fees if you close the mortgage early. It can be a stated amount or it could be a percentage of the mortgage. At any rate, it might be surprisingly higher than you thought.



More Features Could Cost You More

When you refinance, be sure to check that you do not end up paying even more for additional benefits to your mortgage that you aren’t planning on using. For example, switching to a loan with a free offset account may leave you with an annual fee that you weren’t paying before. If you don’t use this feature, all you’ve managed to do by refinancing is make your loan more expensive.


When applying for a new mortgage, in order to get the benefit of refinancing, be sure to ask yourself some important questions and compare the details of what you have right now, in terms of the rate, features, term, and fees, with what you are being promised. Think about the total long-term costs and your own situation and needs before you search and compare rates. In that way, you can be sure to benefit.

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