IS REFINANCING MY MORTGAGE THE BEST DECISION?

Question 1: What is driving your decision?

Refinancing should never be a reactive decision. It is important to have a clear understanding on what is driving your consideration to refinance. By clearly identifying this you can get to the 'Why' when it comes to wanting to refinance.

• Lower Interest Rates

Are you looking to reduce your repayments? Most banks have very little difference (median difference at time of writing .6%) in the rates they offer at any given time so research how these rates differ first.

• Accessing Equity

Are you looking to leverage equity you have for other projects, maybe purchasing an investment property, doing a renovation project, or accessing funds for other purposes?

• Changing loan terms

Refinancing can provide an opportunity to change the terms of your current mortgage, but to make these changes do you really need to refinance, or will your current lender allow you to make those changes too?

Question 2: What will the real cost be?

There are always hidden costs people don’t think about when refinancing, usually because they are too focused on an immediate need/desire rather than fully researching refinancing carefully before making a commitment to do so.

Costs will vary from lender to lender but here’s a couple of key points to help you start researching the real cost.

Settlement costs
Will the new lender require valuations or other reports that are going to incur extra costs?

Penalties
Did you receive cash contributions when you commenced with your mortgage and is any or all of this now wanted back by your bank?

Low equity fees

Did your original mortgage include a low equity fee and if do will refinancing require this again? In essence increasing your indebtedness.

Be cautious about carrots

Sure, the next bank may sweeten the deal by giving you a cash contribution to offset these costs, but I always ask my clients to consider the following.

Why is it banks will give you cash contributions to move to them but rarely give you a cash benefit to stay? Someone must pay for that handout right.

Loan term extension
How many years are you putting yourself back into debt?

You could well be 5 or 10 years into paying down your mortgage and refinancing requires you to go back to a 20 or 30 year term.

Sure, the lender may tell you that you can make lump sum payments in the future to reduce the term but if you haven’t been doing that historically how likely are you to do so in the future.

Carefully consider all your costs so you can balance this with any savings or benefits of refinancing your mortgage.

Question 3: What are the real benefits?

Refinancing certainly isn’t something to avoid it does have benefits too.

• Lowering mortgage payments

Have you gone through a change in circumstances, maybe a loss of income or a significant increase to expenses that isn’t temporary?

Unless there’s been a significant change to your financial situation refinancing might not be the smartest decision if you are just trying to relieve any pressure you might be feeling.

Humans are great creatures of habit. If circumstances have changed then refinancing can be beneficial but if they haven’t, lowering payments is possibly more about needing to free up money to spend because you might not have clarity of where your money goes now.  

• Lower interest rate

Remember my earlier point. Lenders very rarely have any significant differences in their rates at any given time.

It’s not necessarily about the interest rate, it’s the rate in which you can pay your mortgage off that counts so don’t fall into the myth that lower interest rates will get you out of debt faster.

If there is a significant difference sure, that could be counted as a benefit in some situations but do the sums first to make sure it is worth it.

• Debt consolidation
  

Refinancing can provide an opportunity to streamline other debts. In some instances, you can make huge savings from rolling higher interest rate debts into the mortgage. One payment to focus on instead of several can also remove stress and pressure.

• Access to equity

Refinancing can help you achieve other goals faster but only if you have a very clear plan. First develop the plan then determine if you need to refinance to achieve it or can you do it with your current lender.

• Better loan terms

Refinancing may achieve a structure you want that your current lender isn’t prepared to give you. Again like my point above, ensure this structure is part of a clear plan and not just an idea you have heard about and think will work for you too.

Question 4: What are the disadvantages?

Often we become so focused on what we think are the benefits of a decision we fail to spend any time thinking about the possible disadvantages.

Every decision will have unintended consequences and this shouldn't deter us from making choices but knowing what they may be means we can be better positioned to navigate them.

Extended loan term

What age will you be if you stay with your current lender on existing loan terms and just make a couple of adjustments compared with refinancing and having an extended term?

No one wants to be nearing retirement age and realising that they still must work well into retirement if they are to ever pay off their mortgage.

Paying more interest.

You might have been given a lower interest rate short term but has that really disadvantaged you? Ask your advisor for the breakdown. What percentage of your repayments are going towards interest currently and if you refinance what does that change to?

Remember the principal part of your repayments benefit you and the interest part benefits the lender. If you aren't winning you need to have an important reason for giving the lender even more money than you do right now.

Future penalties and costs

Will refinancing lock you into any obligation with the new lender that extends past any known future plans? Does your broker agreement have a timeframe where you will be obligated to pay them if in another years time you had to refinance again or sell your property?

Question 5: What is my strategy next, regardless of which option I choose?

In all my years of coaching and mentoring individuals, those that have chosen to refinance at some stage have all given me the same response to this question. They refinanced and never had any strategy.

Refinancing without a strategy for what happens next can:

• Lead to higher costs over the term of your mortgage
• Longer loan terms meaning your debt free dream becomes compromised
• Loss of fluid finances (immediate access to cash)
• Missed opportunities to grow your wealth and assets
• And a whole lot of other unintended consequences

Mitigating potential risks requires a clear strategy so sit down and create your strategy first and then start asking the question of whether refinancing helps you achieve it.

As a money mentor I help people gain clarity first and find the answer to some of these important questions.

If you would like some help gaining clarity and figuring out some of the numbers book a strategy session using the link below and together, we will remove any uncertainty to the question.

Is refinancing really the right option for you? 

Book a Strategy Session now