With the amount of constant competition in today’s home lending market, it is common to have tempted with the thought of refinancing your mortgage.
Most people refinance or consolidate debts in an attempt to make their loan repayments more affordable in the short term.
Is it a good idea to refinance your mortgage and what do you need to consider before refinancing?
There are a number of reasons why you may wish to consider refinancing your home loan; maybe you want to access your home equity, to consolidate other debts, to get more flexibility and features or simply to get a better interest rate than your current loan.
There may be some costs associated with refinancing your mortgage. These include: Stamp duty, mortgage insurance and early discharge fees.
Before deciding to go ahead and refinance your loan there are a few things you should consider carefully. If you are borrowing extra against the equity in your home, you need t assess whether you can afford the extra repayments. And while you have extra equity in your home during booms in the property market, what will happen if the market drops by 5-25 percent? Will you still have enough equity in your home?
In some cases, the disadvantages of refinancing your home loan outweigh the advantages of refinancing.
The benefits of refinancing your Mortgage.
Most people refinance for one of the following reasons:
- To make improvements to your home i.e extend/renovate.
- To consolidate your debts.
- To change to a lower interest rate.
- To change from a variable rate to a fixed rate interest rate, enabling you to have control of your monthly repayments.
- To changing from a fixed to variable rate, enabling you to pay off your home loan faster.
The disadvantages of refinancing your mortgage and consolidating debt.
Refinancing or consolidating debts may seem attractive options in the short-term. However, they may have disadvantages may occur when viewed over the term of your loan including:
- You may have to pay exit fees to get out of existing loans early.
- The fees and charges of setting up and maintaining your new loan may be more expensive than if you had kept your existing loan/s.
- If you change your unsecured debt into a debt secured over your home, your equity in your home will be reduced and you’ll be paying off the debt for a longer time, making it more expensive.
Using your mortgage to refinance or consolidate debts.
If you are ahead with your mortgage payments, you may be able to re-draw against the mortgage to pay out loans with a higher interest rate.
It may be less costly to transfer all of your other debts to your mortgage account and extend its term than it would be to refinance into a whole new loan. Many home loans can be extended in this way, and a changed mortgage payment plan negotiated.
In the longer term, you may be able to fast-track paying off the extra debt when you get your finances under greater control. This way you can reduce the overall costs of the loan. You might also increase your loan repayments by as much as you can afford, or if you find yourself with extra money, make a special loan repayment.