Monday, July 7, 2008

Is it time to refinance?

Increased competition between lenders has given Australians unprecedented choice when it comes to finding the right home loan. Recent figures show that around two thirds of all new loans are in fact refinancing of existing loans. This number is higher than ever, as more and more borrowers are discovering that reassessing their home loan and reconsidering their lender can save them thousands.

What is refinancing?

Refinancing involves taking out a new loan, and using some or all of the funds to pay out your existing loan. This may or may not involve switching lenders. So, what are some of the main reasons for refinancing?

  1. Putting your finances in order – You can take out a new loan as a way of consolidating your debts, by rolling them all into a new home loan. In other words, you take out a larger home loan and use it to pay off various debts. This can result in savings since the interest rate on your mortgage is usually lower than on credit cards or personal loans.
  2. Borrowing more – Borrowers who have built up equity in their home often take advantage of refinancing to access this equity via a larger loan. This can be a way of financing a home renovation, a new car, or investment.
  3. Getting a better deal – High competition in the lending market means that unsatisfied borrowers may get a better deal if they shop around. However it’s not as simple as choosing the loan with the cheapest interest rate and the lowest fees. You may want a mortgage with different features to your current loan. Often the decision to switch is prompted by a change in personal financial circumstances. For example, if your salary has increased you might want a loan that allows you to make higher repayments in order to pay off your mortgage sooner.
  4. Fixing your loan – On occasions when fixed rates are lower than variable rates, many borrowers take advantage of the opportunity to lock in a low rate for a fixed term. If you’re concerned about risk of interest rate rises, switching to a fixed rate loan can give you peace of mind. You might also consider fixing a portion of your loan.

Tip: With enough equity in your home, you might consider borrowing more to take advantage of discounted lending rates. Using a correctly structured loan means you pay less interest

Finding the right fit

There are many factors you need to consider to before you decide which loan out of the hundreds of products available is the best for you and your circumstances, now and in the long term. Consult a good broker that has the knowledge, access and expertise that’s needed to get the loan to best suit your current circumstances.

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