With a typical mortgage having a 30-year lifespan, it can be hard to pinpoint the exact time during the life of a loan when you should consider remortgaging.
Whether you’ve had your mortgage with the same lender for two decades or you’re only a few years into paying off your asset, the timing of when you decide to remortgage is essential to reap the maximum benefits.
While remortgaging – also known as ‘refinancing’ – can be a fast way to reduce your repayments or pay off a home loan quicker, it’s not always that simple. According to My Expert director, Brett Wadelton you need to have your home re-evaluated before you consider refinancing. “If you are borrowing greater than 80 per cent of your loan you will be charged mortgage insurance again, which will often outweigh the impact of the reduced interest rate, meaning it’s probably worth sticking with your existing lender.”
“It’s also worth having a mortgage broker undertake the valuation. At times, real estate agents might have underlying agendas that can lead to overinflated valuations. Mortgage brokers review your property specifically from a lending perspective,” says Brett.
There are pros and cons to the process that you need to be aware of before engaging a mortgage broker, we explored some of these below:
The pros to remortgaging
Before deciding to remortgage your home, you should first consider your reason for refinancing.
For example, are you interested in remortgaging to:
– save money on your loan
– pay off your mortgage sooner
– or free up some funds for a big purchase such as a holiday or a car?
Reducing repayments is generally the main motivator for home owners to remortgage. Refinancing calculators show that even a small dip in your interest rate can have a major impact on your repayments.
For example, if you put 20% on a $200,000 home with a 30-year loan, at a 4% interest rate, you would pay around $763 per month. At a 4.5% interest rate, you would pay around $810 per month. That’s a difference of $47 per month or $564 per year.
Pay your mortgage sooner
If you secure a lower interest rate but choose to keep paying the same amount as your old repayment, you could pay off your loan sooner – not to mention save thousands in interest.
Access extra money
Remortgaging can be a quick way to access extra cash. If you’ve been making repayments on your loan for a while, you may be able to access your equity by transferring your loan to a new lender. While you’ll get cash back, remember that anything you withdraw will need to be repaid to your lender and will add years (and interest) to your mortgage.
Change your rate type
Locked into a fixed rate and want to make the switch to a variable loan? Remortgaging could be the answer. Fixed rates can safeguard your loan against future rate rises, however with a variable rate if the rate drops further you’ll also reap the benefit and have the added ability to make extra repayments on your home loan.
The cons to remortgaging
There are times when remortgaging may not right for you
For example, although a lender may offer a lower interest rate, you will need to consider other factors that can offset any savings you might make off the improved interest rate.
Check that the new loan term isn’t for a longer period than your existing loan – otherwise any money you will save on the lower interest rate will be meaningless as you’ll end up paying more interest on a loan with a longer loan term duration.
There may also be undesired loan fees associated with switching lenders that you may not have considered.
Before refinancing, make sure you understand the basic details of your new loan. A good mortgage broker will explain in detail:
- How much your new repayments will be per month
- How much you will pay for the new loan (both interest and principle)
- How long you will be making these repayments for
You also need to consider your conduct before applying for a new loan. Brett states that these days, banks can be very strict on late payments or over the limit transactions which may not seem like a big deal at the time. However, these small instances can sometimes be one of the deciding factors in a bank’s decision of whether or not to provide you with finance.