Refinancing Your Mortgage
In the last decade, more people have opted to refinance mortgage to help them manage debt. The Australian Bureau of Statistics have previously reported that, on average, about 20,000 existing mortgages per month are refinanced as people try to manage situations of high consumer debt.
When home loan rates are favourable, homeowners who have sufficient equity built up in their homes can combine the debts with their home loan in a new, bigger mortgage.
The advantage when you refinance loan is that you can reduce the number of debts to be managed, from several accounts to just one — the new refinance mortgage.
In addition, you can have all your consumer debts now attracting high interest rates become part of the new mortgage and be charged at the lower home loan rate.
The disadvantage when you refinance mortgage is that your home loan repayments will get bigger along with any recent rise in home loan rates or interest rates in general. In times when more rate rises are likely, the refinance loan option may add to mortgage stress.
One other downside is that you will have to pay interest over a longer period of time. A mortgage may last up to 40 years, so more interest will be charged on your original debt in the long run.
Steps to Refinance Mortgage
It is very easy to refinance mortgage, especially when you already have substantial equity in your home.
1. Contact your mortgage lender or mortgage broker.
If you really want assistance to find the most favourable home loan rate, a mortgage broker you trust may be more helpful. Mortgage brokers usually have information on the applicable rates and terms for refinance loan arrangements from various lenders.
If you still want to work with your existing mortgage lender, it is to your advantage to get an idea of refinance mortgage rates before you sit down to negotiate with your lender.
2. Apply to refinance loan.
Once your mortgage broker has found a suitable lender, or you are ready to talk with your existing lender, you can proceed to apply for the new mortgage.
Borrow only what you will need; remember, you could lose your home if you borrow too much and later on default on the refinance mortgage repayments. Don’t forget to include supporting documentation that is required in the application.
3. Await lender’s action.
The lender will evaluate your application and (hopefully) approve the loan. They will also prepare the documentation for the loan.
4. Arrange for settlement of fees and charges for the refinance loan and the drawdown.
Costs of Refinance
When you refinance mortgage, you are terminating your current mortgage earlier than scheduled and replacing it with a new one. You will thus have to consider exit fees, early repayment charges on the existing loan and/or discharge fees on the existing mortgage.
The other charges you had to pay when you first took out your mortgage will have to be paid again. So you must consider the costs for lender’s application and settlement fees, lender’s mortgage insurance, property valuation fees, registration of the new mortgage, and stamp duty (where applicable).
If the savings you expect from mortgage refinancing will exceed the costs associated with it, including the exit fees, then it will make sense to refinance loan. While it may be desirable, or even necessary, to refinance mortgage in some situations, do remember to work out the figures.
Your mortgage broker can help you weigh the decision. Failure to do so may cost you more over time.
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