Refinancing is not all about the interest rate…

In the realm of personal finance, the term “refinancing” often conjures thoughts of securing a better interest rate on a mortgage. However, let’s delve into the basics and uncover some other reasons why people refinance.

What is refinancing?

At its core, refinancing a mortgage involves replacing an existing loan with an existing lender with a new loan from a new lender. Homeowners embark on this journey for various reasons, such as;
  • seeking a lower interest rate
  • extending the mortgage term
  • tapping into home equity to address financial emergencies
  • investing in property (refer to our recent video)
  • consolidate debt.

Can I ask my lender for a better interest rate?

Before delving into the complexities of refinancing, it’s prudent to inquire with your existing lender about the possibility of securing a better interest rate. This straightforward approach can often yield surprising results, especially in the current landscape where lenders are fervently attempting to retain customers by offering rates below the market average. Consider this: for one of our clients, we recently obtained an interest rate that was 0.10% per annum lower than the prevailing advertised rate from their lender.

So what is the point in refinancing if I am not achieving a better interest rate?

Over the past two years, interest rates have witnessed a significant uptick, signaling the end of the era of ultra-low rates like the coveted 1.79% per annum. In light of these changes, our clients are increasingly turning to refinancing not just for interest rate reduction but also for extending the loan term.

For example;

If you had a $750,000 loan that you set-up 5 years ago, you probably have a remaining loan term of 25 years, with a balance outstanding of around $700,000 (as you have been repaying this loan for 5 years now). Most commonly in Australia, home loan terms are for 30 years.

We have contacted your existing lender, and we have managed to lower your interest rate to a market leading rate of let’s say 6.00% p.a.

Your minimum monthly repayment is normally calculated on the original loan amount on the original loan term, so in this case, based on a $750,000 loan, and a rate of 6.00% p.a over 30 years, your repayment would be around $4,500 per month.

As mentioned above, you now only owe $700,000, so if we extend your loan term to 30 years based on a $700,000 loan based on a 6.00% rate, your repayments would drop to $4,200 per month. A saving of $300 per month!

How does this strategy help investors?

This refinancing strategy proves invaluable for investors navigating an environment where rental income struggles to keep pace with monthly loan repayments. With rental income typically secured for 6-12 months, the fluctuating interest rate landscape can lead to unexpected cashflow losses for investors midway through a lease.

Is this strategy for everyone?

It’s essential to acknowledge that refinancing, particularly with an extended loan term, may not be suitable for everyone. While it offers immediate financial relief, the prospect of extending a home loan into retirement warrants careful consideration due to potential unintended consequences. This strategy is best suited for individuals disciplined with their finances, making extra repayments or seeking to minimise monthly obligations to enhance their financial position, perhaps to invest in additional properties. Before embarking on a refinancing journey, it is highly advisable to consult with a professional mortgage advisor and possibly a financial planner. This professional assessment ensures that the chosen strategy aligns seamlessly with your broader financial goals and aspirations.