Refinancing your mortgage can be a challenging prospect. Even though there are many good reasons to consider this option, it can still be extremely confusing and daunting.
Still, refinancing is more popular than ever in Australia. It allows homeowners to essentially change the terms of their mortgage, getting better interest rates, better overall terms, or accessing some of the money in their home.
The process of refinancing can be fraught with difficulty and potential problems. You can choose to either refinance directly through your original mortgage lender or go through the process with the help of a broker.
We think it’s almost always best to work with a broker, and in this article, we’ll explain why. We’ll also cover some of the main reasons to refinance your home, and look at some general tips.
Why Should You Refinance Your Home?
There are a number of good reasons to refinance your home, such as:
Get a better interest rate. Perhaps, when you first got your mortgage, interest rates weren’t very favourable, but they have now changed. Refinancing can help you cut down on your interest payments and save a significant amount of money over time.
Shorten the term of the mortgage. Maybe your income has increased quite a bit since you first got your mortgage, and you can now afford higher monthly payments. Changing the terms can ensure you pay off the loan much more quickly.
Access emergency funds from the equity of your home. By refinancing, you can choose to pay more in future in return for some cash from the value of your home right now. This can help meet emergency expenses or consolidate debt. It can be a good idea in the right circumstances, but it can also mean a slippery slope into more debt.
Can I refinance my home?
It’s not always possible to refinance your home. Usually, you’ll need to have owned the property for at least 12 months, although this isn’t a hard-and-fast rule.
A better rate can usually be obtained by working with your original lender as opposed to a brand new one, but this is far from the only case. This is one area where working with an experienced broker can help you make the best decisions and avoid trouble.
What do I need to do beforehand?
There are some steps you’ll need to take before attempting to refinance your mortgage:
Get to know your home equity. Typically, house prices are rising in Australia, but this isn’t true for all areas and it helps to be aware of where you stand.
Get to know your credit score
Get to know your debt-income ratio. Ideally, this should be 36% or less if you want the best chance of securing a good deal
A good broker will help you with all of this and ensure you have everything you need to apply and stand a good chance.
How it works
When you refinance your home, you basically get a new loan to pay off your existing loan. The money you pay doesn’t go to the seller of the home, instead, it goes to paying off the balance of the old loan.
You’ll need to go through the usual loan application and approval process, and the same rules and expectations will apply as the first time you applied for a mortgage.
If you work with a broker, the process will go something like this:
The broker will review your financial history. This usually includes a full credit report and details of your income. The goal here is to assess whether or not you can realistically afford the new terms.
Next, they’ll comb through multiple potential lenders and seek out a pre-approval for your new loan. During this process, there will be a lot of negotiation and discussion to get you the best rates possible for your new mortgage.
Why use a broker over a lender?
You don’t have to work with a broker when refinancing your home. You can work directly with a lender. However, there are multiple significant advantages to working with a broker:
Brokers have many years of experience, knowledge, and connections. They can ensure you get the best possible terms for you.
Brokers work with a wide range of different lenders, and this allows them to comb through many different loans that you might not have time to. Brokers also often have access to deals that aren’t available or even visible to the public.
Brokers can guide you through other elements of the refinancing process, for example, legal issues
General tips for refinancing your home
Be clear on your goal. There are many reasons to refinance, from getting better interest rates to accessing home equity. Be clear on why you’re doing this before you begin, and it’ll be easier to get the terms you want.
Figure out your break-even point. At which point will the savings in monthly payments cover the cost of refinancing? This helps you plan your financial future more clearly.
Remember that if you’re paying less for your mortgage, you may be able to deduct less from taxes, which may affect your financial plans.
Working with a broker to refinance your home can help you get the best terms, avoid any pitfalls, and get you en route to a more suitable set of payment terms. This is much more achievable with the help of a professional than if you go it alone.
At Lynam Home Loans, we have years of experience helping homeowners in Mackay, Queensland refinance their homes and get on the path to a better financial future. To find out how we can help you do the same, get in touch.