Nobody likes being stuck in a relationship that is not working for them … especially a financial one. When we see interest, rates dropping or moving up, there is the urge to assess where we are at with our mortgage. Just like any other financial commitment, you must make sure you are getting the best deal … who wants to be paying more if you do not have to? Who wants to add more time to their loan repayments?
I work with many people who come to me because I believe in telling it straight. I am not going to recommend refinancing just because interest rates are dropping. What? Yes, I know. A bit different to other brokers who are eager to refinance your loan and wrap it in ‘you will save thousands’.
But you know what? It may actually cost you more to refinance, and what your broker may not be telling you, is that every time you refinance, they get a chunk of money from the bank for doing it.
So, ask them why it is a good idea (if you are working with me, I’d tell you upfront if it is a good idea and how much I get out of the process).
Here are five things you need to consider if you are going to refinance.
- Are you going to be better off financially?
Only do it if you are going to end up in a better position financially. Working this out means you will need to take into consideration any fees and charges you might incur by breaking your original loan.
Loans with a fixed rate of interest may have break costs, whereas loans with a variable interest rate do not but they all incur discharge and other fees.
Weigh up the cost of any fees with the potential gains you may make by switching to a loan with a lower interest rate. I will tell you if it’s not worth moving for the sake of a small interest cut, you need to look at the bigger feature and include ongoing fees and other hidden costs.
- What are the costs?
Aside from fees incurred by exiting a loan early, it’s also important to take into account costs attached to your new loan, including application and annual fees. Is the saving in interest going to cover the costs to refinance?
- Is the loan right for you?
Banks are always coming up with new products especially now there are so many options aside from the big four banks.
There are three main loans:
- Fixed interest rate loans
- Variable interest rate loans
- Loans that have both fixed and variable components
The right loan will depend on a variety of factors including your views on interest rates. If you think interest rates are rising, you might wish to fix all or part of your loan. But you may wish to use a variable rate if you think rates are coming down.
Another thing to consider are the features of a loan:
- offset facilities
- additional loan repayments
- How much do you need?
How much do you want to borrow? If you are moving to another lender, it can be a chance to take advantage of a better interest rate and at the same time top up your loan for other purposes.
For instance, you may wish to invest money in your children’s education or purchase an investment property.
Another idea is to use the money to renovate and lift the value of your home. Or you may wish to increase your loan to buy a car, or go on a holiday.
- Do you want to consolidate your debts?
Credit card debt adding up? Do you have a personal loan on the go? Managing multiple payment getting top much? You can refinance and roll all your debt into one.
Adding personal loans or credit card debt to a home loan can reduce your overall cost of borrowing and streamline your finances as you will only need to make one payment. It also means you only pay one set of fees, rather than multiple fees for multiple loans, which can reduce you overall costs.
However, if doing this means you extend the length of time to pay back your loan, you could incur higher interest charges over time.
You know what your best bet is? Find a broker that will lay it all out for you in easy to understand language and actually cares about you creating a wealthy life (hmmmm …. Where do you find one of those?)