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As market conditions change, it sometimes means a loan needs to change with it. Refinancing is the way to do that. Refinancing a loan is the process of replacing the original loan with a new one, usually to a loan with more benefits. That doesn’t mean the debt goes away – it’s just being packaged into a new loan, and this is where Euphoria Loans can help you.
The deal you first take may lose its competitive advantage over time. This is where refinancing comes in, you can switch your home loan to another lender in order to leverage the benefits of that offer, these include additional optionality on the loan or reduced fees and rates.
For borrowers with a good credit history, refinancing can be a good way to convert a variable loan rate to a fixed, and obtain a lower interest rate. Borrowers with less than perfect, or even bad credit, or too much debt, refinancing can be risky.
In an ever changing economic climate, it can be difficult to make the payments on a home mortgage. Between possible high interest rates and an unstable economy, making mortgage payments can become tougher than expected when you first agreed to the loan. Should you find yourself in this situation, it might be time to consider refinancing. The danger in refinancing lies in ignorance. Without the right knowledge it can actually hurt you to refinance, increasing your interest rate rather than lowering it.
At Euphoria Loans we will take you through the basics of refinancing a home loan & the steps you can take to advantage for doing so.
Switching to a new home loan is about providing you with the greatest amount of benefit. This can include saving money, access to loan benefits, or consolidating debts, all of which can help you achieve your financial goals.
Here are some of the top reasons home owners refinance their loans:
Find a lower rate: A common reason for refinancing is to save money on interest rates. This generally requires that you refinance into a loan with a lower interest rate than your existing interest rate. Especially with long-term loans and large dollar amounts, lowering the interest rate can result in significant savings. While a great rate alone shouldn’t be the one & only factor in choosing a home loan, it defiantly makes a move worthwhile.
Improve cash flow: Refinancing can lead to lower mortgage repayments. This makes cash flow management easier and leaves more money in the budget for other monthly expenses. When you refinance, it’s often the case that you extend the amount of time that you’ll repay a loan – this means lower monthly payments.
A lower interest rate can also lead to lower monthly payments. However, simply extending the life of a loan can actually mean you’ll pay more for the loan over the long term.
Shorten the loan term: Some home owners want to refinance into a shorter term loan. For example, you might have a 30-year home loan, but that loan can be refinanced into a 15-year home loan. This might make sense if you intend to make larger payments to get rid of the debt more quickly. Of course, you can also just make extra payments without refinancing, but its always worth speaking to a mortgage advisor first to see which option is best for you.
Consolidate debts: If you have multiple debts, it might make sense to consolidate those loans into one single loan. When refinancing, it is a great time to consolidate outstanding debts into one payment. Consolidating high interest debts into a low rate home loan reduces confusion and makes the payment a lot more manageable.
Change your loan type: Even if you don’t get a lower rate or monthly repayment, it can make sense to refinance for other reasons. For example, if you have a variable rate loan, you might prefer to get a different loan with a fixed rate. This would make sense if rates are low but you expect them to rise, something which at the time of writing is inevitable in Australia right now.
Get the latest loan features: The home loan market is always changing & lenders are constantly introducing features and packages. Your current loan may have you missing out on additional benefits such as:
Flexible repayments — allowing you to pay a little extra without being penalised, perfect if you want to pay off your loan sooner.
Redraw — allowing you to withdraw any extra repayments when you need.
Flexible rate options — switching between variable and fixed rates or splitting your loan, may help you manage your mortgage as interest rates change.
Portability — if you move to a new property, you can take your home loan with you
Repayment break — some loans give you the ability to take a break from repayments or switch to interest-only payments for an agreed period.
Refinancing a mortgage is a major move. It can result in huge savings, but how do you know if you should refinance? The short answer is that you should do it if you’re going to end up saving money and if it’s not going to lead to any problems.
In general, you should refinance if you can reduce your total lifetime interest costs. However, if the reason you want to refinance is to consolidate debts, it’s questionable. If you are refinancing unsecured debts with a secured loan, you’re taking a risk. For example, you might use a home equity loan to pay off credit card debt. Yes, you’ll pay off the debt with a lower interest rate, but you’ve also put your home at risk.
You might also think you should refinance if you can get a lower payment. While it may be nice to pay less each month, make sure you look at the big picture. Extending a loan can increase the total amount of interest you pay over your lifetime.
How do you know if you’ll save money? Run the numbers. Speak to an advisor at Euphoria Loans & they will provide you with a free home loan review to determine if it’s the right time for you to refinance.
Refinancing isn’t always the best solution. Even if you get a lower interest rate or monthly repayment, it could be a mistake to get rid of your existing loans. It’s important that you’ve weighed up the pro’s & con’s of refinancing before jumping straight in…
Some things to consider before refinancing your home loan:
Transition costs: There are some switching costs involved in moving your home loan. You will want to make sure you’re going to break even before you pay those costs. Your personal home loan adviser at Euphoria Loans will take you through these costs to ensure it’s worth your while making the move.
Additional interest costs: If you decide to stretch out your home loan over a longer period of time, you will end up paying more interest. You might be on lower monthly repayments, but that benefit can be erased by the higher lifetime cost of mortgage. Make sure you understand the numbers to see how much it’s really costing you to refinance.
Lost benefits: As mentioned before, there are many additional benefits to some home loans & some of these benefits many not be included with other loans. If you currently take advantage of the additional benefits your current loan offers, they can sometimes outweigh the other reasons for refinancing.
If you’re thinking of refinancing and increasing your loan, lenders will be looking for many of the same things you had to provide when you applied for your current home loan.
To get a good idea of how much you really can afford to spend/borrow, you can use a borrowing calculator here. At the end of the day, lenders need to know how much you can afford to repay each month.
Some things they will consider:
Your income
Your repayment record
Other financial — personal loans, credit cards, car loans etc.
Your living costs — utilities, council rates, strata fees, transport, entertainment, insurance etc.
When you add up & deduct all of these expenses from your income, a lender will be looking for a figure that will comfortably cover your repayments. Your new lender may even want to see that if interest rates go up, you can comfortably meet the higher repayments.
Your next step is to speak to a mortgage broker. The mortgage brokers at Euphoria Loans offer great value in helping you understand different home loan options and recommending the ones which are best suited you.
When choosing a new loan, you need to consider what your personal needs are for a new mortgage. There are numerous benefits and rates to consider, it is difficult to have all of the benefits you are after with low rates and fees, so sometimes you may need to compromise.
When analysing your needs you need to think about what means the most to you in the future. Switching home loan providers is not something you want to make a habit of, and ideally, your new loan will meet your needs for years to come. If you are planning to sell your property in the near future, refinancing can still be viable. However, you should consider getting a variable rate loan. Fixed rate loans will usually have higher fees when switching to a new provider.
There are many lenders I Australia offering a wide variety of loans. The ‘big 4 bank’ (CommBank, Westpac, ANZ and NAB) usually offer a slightly higher rate and tighter borrowing criteria but it gives you more reliability, in-store and online service.
However, smaller and online lenders can offer you better discounted rates, but you can be losing out by receiving little or no in-store service. When refinancing with Euphoria Loans, we’ll work with you to find what lender is right for you by evaluating what your personal needs are & where it’s worth you compromising on benefits & rates.
