Getting a mortgage is a big deal, but once you’ve signed on the dotted line stress is quickly replaced by excitement. Come move-in day, you’ve got the paint, bought the furniture, and you’re ready to turn your house into a home. In the blink of an eye, it’s almost a year later and you get word from the bank that your fixed rate is coming to the end of its term – what do you do?
Most people tend to set and forget their home loan. They fix a rate for a period and take comfort knowing how much they need to pay each month. But interest rates change, and while the status quo is the easy option for the short-term, in the long run, it could cost you and your family thousands of dollars. You can solve that by re-fixing or refinancing.
The good news is, refinancing or refixing your mortgage doesn’t have to be hard – but it’s important to understand the pros and cons of each, so you can make an informed decision when the time comes.
Here’s what you need to know:
What’s the difference?
Refinancing is the process of transferring your home loan from one bank to another. You’re ‘paying off’ your existing loan and taking out a new one at a different bank.
Re-fixing is the process of locking in the interest rate for a new term (usually from one to five years) after an old fixed rate expires.
Refinancing – the big picture
Whichever way you look at it, a mortgage is a long-term financial commitment. But a lot can change in 30 years – especially in the property market!
There are several reasons to consider refinancing:
- Get a more competitive home loan rate
- Restructure your mortgage to match your financial situation
- Shorten the term of your loan
- Consolidate debt
- Access the equity in your property
While most borrowers refinance to take advantage of lower interest rates, there’s a lot involved with switching lenders. Therefore, you need to be sure the benefits outweigh the costs.
Understanding the costs involved
There will inevitably be penalties or fees associated with changing lenders – break fees from your old lender, application fees to pay the new lender, legal fees and early repayment penalties on your existing loan. You will want any potential savings to offset these costs.
Cash incentives
Lenders often bend over backwards to get new clients. Cash incentives are used by lenders (especially banks) to encourage people to refinance their mortgages. They can often work in your favour and even be enough to cover the costs of refinancing. You might get a better rate and end up with cash in hand.
Fixed or floating
While you’re at it, you may also like to consider restructuring your mortgage. You might be able to significantly reduce your fortnightly or monthly repayments by finding that winning combination of fixed and floating interest rates.
Refixing – locking in a new rate
What some borrowers don’t realise is that a rise of even 1% interest can cost you thousands of dollars over the term of your mortgage. At the end of your fixed-rate term, your bank will likely set a new rate for you – but it’s a good idea to consider all of your options before you hit send on that new contract.
Most banks will allow you a 60-day window to re-fix your home loan. This is when you want to take advantage of any movements in the market and reduce your fixed interest rate.
By fixing at a lower rate, you can significantly reduce your fortnightly or monthly mortgage repayments – freeing up cash for other expenses. You could also keep your repayments the same and cut years off your loan – leaving you with more cash in the long-run.
Fixed or floating
Securing a better rate will most certainly be top of your list, but a mortgage isn’t just about the rate. Fixed monthly repayments are great for peace of mind, but they’re also less flexible than a floating arrangement. On the other hand, if interest rates increase and your home loan is floating, you may be forced to fix at a much higher rate.
You could consider a combination of the two by splitting your loan. With this arrangement, you pay a portion of your loan at a fixed rate and the remainder at a floating rate. You’ll know roughly what you need to pay each month, you can take advantage of financial savings if interest rates fall, and if they rise, a part of your loan is protected.
The right time – and the right mortgage broker
Perhaps you’re coming towards the end of your current loan’s term, your income has significantly increased or you want to borrow more to buy a new house or investment property. You’ve also noticed interest rates have dropped.
Just like your initial mortgage, finding a more competitive rate – and locking it in – requires skill, knowledge, and negotiation. This is where you’ll find the expertise of mortgage brokers helpful. They can negotiate the best rate in the market and structure your mortgage, so it works in favour of your needs and circumstances – and pays off your debt faster.
Thinking about re-fixing or refinancing your mortgage? Have a chat to the team at Global Finance today.
**These are general guidelines and are by no means a reflection of bank or lending policies