How refinancing could boost your cash flow
When money is tight, people tend to cut back on extras like coffee and eating out, try to reduce utility bills and grocery budgets, or even look for second jobs. Many don’t think to look at changing their biggest expense – their mortgage.
For most people, mortgage payments are the most expensive part of the monthly budget. Although finance experts recommend spending no more than 40% of your income on mortgage payments, many people – particularly first home buyers – end up spending more. When you add in other costs of living – utilities, rates, food, home improvements, vehicles – making ends meet can be a struggle.
If you’ve been in your home for several years, it might be time to take a second look at your mortgage. Refinancing or restructuring your loan could help reduce your expenses, improve your cash flow, and give you easier access to your money.
Refinancing sounds complicated, but it just means changing the structure of your loan in some way. Often, it means switching to a new lender with better interest rates and loan options, but it’s also possible to refinance with your own bank – they may let you change the terms of your loan or adjust your floating and fixed rates. It’s all about making the loan work for you and your financial situation.
People often refinance to take advantage of lower interest rates or new loan options that became available after they took on the original mortgage.
Although there are usually costs and penalties associated with breaking your mortgage before the term is up, the potential long-term savings can make it worthwhile. It all depends on the terms of your loan, your interest rates, and your refinancing options.
Boosting your cash flow
If you’re struggling to cover your expenses with your current income, or if you need extra cash for a renovation or other project, restructuring your mortgage could help. Depending on the terms of your original mortgage, refinancing could help reduce your costs and improve your cash flow – or at least make it easier to access extra money when you need it.
Reducing your mortgage payments
Restructuring your mortgage could help reduce your monthly mortgage payments, which leaves you with more flexibility in your budget. Although refinancing can’t reduce the overall amount of the loan, a lower interest rate or a longer loan term could make a big difference to your repayments.
Avoiding bank fees
Monthly bank fees seem small, but they add up surprisingly quickly. If you have two credit cards and multiple accounts, you could be spending a chunk of change on fees every month. When you first take on a mortgage, many banks and lenders will give you a break on fees for the first year or two. When that stage is over, refinancing with a new lender could help you avoid hefty fees – and give you a bit of extra cash in hand.
Better access to cash
A traditional mortgage is a single, lump-sum loan with one interest rate. Now, many banks and non-bank lenders offer a wide range of mortgage options. Features like revolving credit can help with cashflow – this option essentially gives you a large overdraft to use for day to day expenses. Your income goes into the revolving account, and you only pay interest on the amount you’ve used at any one time. Although a revolving credit account doesn’t necessarily reduce your payments, it does give you a cushion of available cash to use for unexpected expenses.
New loan, new bank
If you’re keen to start work on a home extension or buy a new vehicle, folding the new loan into your current mortgage is often the cheapest way to do so. But some banks and other lenders have strict conditions on extra lending, and will not give you the go-ahead. In these cases, refinancing with a second lender may be the best way to get the extra loan and take advantage of lower interest rates.
Most mortgage payments cover the interest and some of the principal – that is, the original amount of the loan. Going interest-only means you’re only paying off the interest owed on the loan, not the loan itself. This option can be useful if you’re in a short-term financial bind, but it’s not necessarily a good financial choice in the long term, which is why many banks have stringent rules around interest-only lending. Repayments will be lower, but you won’t be reducing the amount of your loan or building equity in your property.
Check with the experts
Refinancing can be beneficial, but it’s not a cure-all for financial issues. In some cases, penalties can mean it’s not worth breaking your mortgage at all. If you’re unsure about the long-term implications of refinancing, it’s smart to talk to a mortgage broker or advisor before you make any major changes. They’ll often be able to negotiate on your behalf with banks and other lenders, and they’ll have a better understanding of the long-term costs. It’s all about setting up a loan that works for you and your finances.
Talk to the refinancing experts at Global Finance now.