Refinancing- A Wise Financial Decision or Not?

Refinancing- A Wise Financial Decision or Not?

These days refinancing is very common in Australia. Around $15.6 billion of loans were refinanced in January 2021, and in 2020, almost 500,000 refinanced mortgages were recorded that represent about 8% of all Home Loan Refinance cases. With competitive interest rates, you too may want to refinance your assets to access additional funds and grow your existing portfolio. However, along with major benefits such as shorter loan tenure, reduced monthly payments, refinancing can cost you between three to six per cent of a loan’s principal as with an original mortgage. Also, it requires an assessment, and costs you fundamental fees, application fees, break fees, etc. Hence, before taking the big leap, you must weigh down every factor to determine if refinancing is a wise financial decision or not.

Advantages of Refinancing

  • Securing a lower rate of interest: Getting a mortgage with a lower interest rate or reducing the interest rate on your existing loan is one of the best reasons to refinance. The thumb rule is that if the interest reduces by a minimum of 2%, you must consider refinancing. According to several lenders, 1% savings is good enough to refinance a home loan refinance. With a lesser interest rate, you save money, build equity and lower the monthly instalment amount. For instance: Suppose you have a loan of $450,000 interest rate of 3% annually for 25 years; you will be paying $2,133 as monthly repayments. Refinancing can offer you a reduced interest rate of 1.99% so that your repayments reduce to $2,011 per month.
  • Reduce the tenure of Loan: Sometimes, refinancing an existing loan for another without any significant change in the monthly payment, but reduced interest rates have a shorter loan period. Hence, you can cut the term to half. And even if your monthly repayments increase a bit that you can take care of, you will save thousands on interest. However, ensure you do the math or seek guidance from Mortgage Broker Refinance Brisbane to determine how much you would save on interest.
  • Tap into your Equity: If you use your accumulated equity to home loan refinance, you might only need to save a deposit for the first property. The consecutive properties can be funded through the capital gains built upon your prior investment. Also, you get tax benefits If you tap the equity in your home, which you can utilize to buy an investment property or cover expenses such as remodelling your home, or child’s college education, etc.
  • Save more money with reduced monthly payments: Refinancing comes with an option to reduce your monthly instalments; as a result, you can save money and build a cash buffer for future or other tasks.

While refinancing comes with some amazing benefits and helps you grow your portfolio, the process has few cons. Take a peek:

Advisors: How to Talk to Clients About Refinancing

Disadvantages of Refinancing:

  • Fees: Refinancing involves certain fundamental fees that can cost you hundreds or thousands of dollars. Fees such as discharge fees, break fees, application fees, annual fees, valuation fees, etc., have to be paid. Hence, it is advisable to connect with a professional mortgage broker in Brisbane who could assist you better so that you do not land up but could end up burning a hole in your pocket.
  • Lenders Mortgage Insurance: If your equity is less than 20% of the property value, or if you are borrowing more than 80% of your property value, then you will be charged Lenders Mortgage Insurance or LMI when refinancing your home loan. LMI protects the lender if you are unable to make repayments. It can be very expensive and must be paid in advance. However, a professional mortgage broker can help you connect with the best lenders that offer a great deal and might not charge LMI until the loan reaches 90% Loan to Value Ratio (LVR).
  • Cash Buffer: You will have to continue paying the mortgage even if the property value declines. So, in case your investment property does not cover mortgage repayments for any reason, the money has to go from your pocket.

Refinancing is one of the best methods to save funds, keep a check on your debt and offer you flexibility for achieving your financial goals, but only when done right. Hence, it is advisable to partner with the experts. An experienced mortgage broker guides you through the entire process of refinancing and recommends a big pool of lenders that suits your financial capabilities and limitations.