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Making changes to suit your life

When you sign the papers for your first mortgage, it feels as if you’re committing to your lender for the next thirty – or more – years. But that’s not always the case. While many people stay with their original lender for the term of the mortgage, others re-mortgage their property and switch over to a different bank or non-bank lender.

People choose to re-mortgage their properties for many reasons – getting a lower interest rate, unlocking equity in their home, renovations or extensions, and even consolidating debt.

Remortgage basics

Remortgaging or refinancing involves taking out a new loan with a new lender (or even your current lender) and using that money to pay off your existing mortgage. Your property will then be used as security for the new mortgage. The new mortgage could have a lower interest rate, be larger than your original loan or structured differently.

Applying to re-mortgage is much like applying for your original mortgage. You’ll need to speak to a mortgage broker or lender, provide proof of income and assets, and then sign the new mortgage documents once you’re approved. Breaking your contract on your original mortgage can incur steep penalties, so it’s important to work out whether lower payments or cash gained by re-mortgaging will make up for that cost over time.

Reasons to remortgage

There are a few common reasons to re-mortgage – taking advantage of a lower interest rate, financing renovations, consolidating debts, or simply unlocking some of the equity in your home.

Lower rate, lower repayments

If interest rates have dropped significantly since you took out your original home loan, you could re-mortgage in order to get a lower rate. Even a seemingly small difference in rates can make a large difference to your monthly payments and the amount you’ll end up paying overtime.

If you’re considering this option, make sure to do your homework – use a mortgage calculator, or better yet, talk to a mortgage broker to work out what your monthly payments will be and compare them to your current payments. Don’t forget to include any fees charged by your current lender.

It’s also smart to have your broker talk to your lender before you make the decision to switch – you may be offered a better rate to keep you around.

Remortgage to renovate

If you’re keen to renovate your property but don’t have the cash available, remortgaging could be a way to fund your project. Basically, you’re freeing up some of the equity in your home by taking out a second, larger loan.

For example, if you owe $250,000 on your current mortgage, you could refinance for $350,000, using the increased value of your property as security. When the original mortgage is paid off, you’ll be left with $100,000 to spend on improvements or extensions.

Because renovation can increase the value of your property, re-mortgaging, for this reason, can end up paying off when you sell.

Dealing with debt

If you have credit card debts, car loans, or other personal loans that you’re struggling to pay, taking advantage of the equity in your home can be a sensible option.

Remortgaging to consolidate debt involves using your home as security. You re-mortgage at a higher level to clear debts and pay them off slowly along with the rest of the mortgage. This can save you money in interest and penalties, and because you’ll no longer be dealing with multiple loans or lenders, it also makes things less stressful.

But this approach is not risk-free. Depending on how much you owe, you could make your repayments unaffordable, which might put your home at risk if you fail to meet them. You may also incur costly penalties for breaking the contract with your original lender, adding to your debt level.

Unlocking your equity

If you’ve been living in your home for several years, it’s likely to have increased in value – but it’s difficult to access that added value without selling the property. That’s where remortgaging can be useful. You break your first mortgage contract, take out a new, higher-value loan based on the value of your property, and use the difference for whatever you like – starting a business, buying a second property, travel.

However, although it may be tempting to release some equity and gain some ready cash, it’s important to re-mortgage for the right reasons. A larger loan will have higher payments and may even make things difficult if your home drops in value in the future.

Is remortgaging right for you?

If you’re considering remortgaging your property – whether to consolidate debts, lower your interest rates, or access some equity – it’s important to get expert advice before you make the change. A qualified mortgage broker or adviser can talk you through the pros and cons, calculate your savings and repayments, and help you work out whether remortgaging is right for you.

Want to know more? Talk to the expert mortgage team at Global Finance.