What is refinancing?

What is refinancing and when should I do it?

As a homeowner with a mortgage, chances are you’ve heard of the term 'refinancing'.

Refinancing involves reviewing your current mortgage, and potentially swapping your loan to another lender, who can better meet your current needs, wants and circumstances.

Refinancing can be a strategy to secure a lower interest rate, switch to a different type of loan and can also allow you to consolidate your debts or pay down your mortgage more quickly.

Another common reason borrowers look to refinance is to access equity – the amount you'd get from selling your home after settling any associated loans and any other costs associated with the property.

However, refinancing isn’t suitable for everyone. There are many different factors you’ll need to consider when thinking about refinancing a loan.

So how will you know that refinancing is the right option for you?

The first step is to speak to a professional, such as a mortgage broker, about your needs, objectives, current financial situation and whether you can afford a different loan structure, particularly if you have more than one property.

Are you looking to pay less interest?

If your purpose of refinancing is to aim for a lower interest rate, this could potentially save you a lot of money in the long-term.

While saving money is often one of the biggest benefits of refinancing, it may not be as straightforward as that and careful consideration is required.

Sometimes refinancing may only save you a small amount per year, particularly when you take into consideration any exit costs, application fees and taxes involved. Refinancing may also not offer benefits if the loan will attract Lenders Mortgage Insurance (LMI) or features like an offset account aren’t offered with the new loan.

However, if it’s going to save upwards of $1,000 a year, refinancing might be a sensible approach.

At this point, the broker will need to find out about your existing loan, repayments and current loan structure.

Your mortgage broker will also need to find out more about your current financial situation, including your income, any other current debts and about any assets you own.

The current value of the property is also taken into consideration, your broker will have access to current data that will indicate what your property is likely to be worth.

The broker will then review the various loan options and figure out whether it’s worth it for you to refinance.

Your mortgage broker can tell you if getting a lower interest rate from your current lender can be achieved without refinancing.

Do you want to change your loan type?

Refinancing may allow you to change to a different loan type, for example switching from a variable loan to an interest only loan.

If you do decide to go down the refinancing path, working with a broker rather than going straight to a lender has advantages.

Brokers generally have access to loan options from a range of different lenders and if there’s a better opportunity for you, they’re usually able to access it.

Do you want to consolidate your debts?

If you want to refinance to lower lending costs to help you manage your monthly repayments, speak to your mortgage broker who can negotiate with your current lender for a rate suitable to your current situation.

Your broker can also help you look at alternative options to consolidate your personal loans and credit cards into the one loan. This could help you in lowering your monthly repayments, or help you keep your repayments on time, and even save you interest in the long term.