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Is refinancing the right strategy for you?

Thursday, 20th Sep 2018
Categories: Finance, Newsletter

As an investor or home buyer, choosing the right loan product can be crucial to your financial security and long-term investment plans. However, the lending environment and your own financial situation can also change over time, which means your original loan may not always support your ongoing needs. In these situations, many investors will consider refinancing their loan to achieve a better rate or gain access to products that better suit their circumstances. However, this strategy can also carry significant risk for those who don’t understand the costs and implications involved. So, when should you think about refinancing? And what are the factors you need to consider before doing so?

Why refinance?

Better rates elsewhere – The lending environment is highly competitive and will often fluctuate with changes in market conditions and lender’s policies. This means that what might seem like a good rate today won’t necessarily be the best interest rate for you in future. Many investors will choose to refinance when there are lower interest rates available with another lender. In addition to reducing monthly repayments, this could ultimately help you pay off your home or investment loan sooner. In addition, refinancing may enable you to access a greater range of features and add-ons, such as redraw facilities and flexible repayment plans. Reviewing your loans every twelve months, or when there are considerable changes in the lending environment, can help you ensure you are still receiving the best rates and products for your circumstances.

To leverage equity – Another reason investors might choose to refinance is to access the equity they need to progress in their investment journey. If you are planning to renovate or want to expand your portfolio by investing in another property, you will no doubt need to borrow more money to do so. If you’ve paid off some of your existing loan and your property has increased in value, refinancing may enable you to access the equity you need (and therefore borrow the money you need) to take the next step towards your long-term investment goals.

Your circumstances have changed – As an investor or home buyer, it’s important to ensure you choose the right lending solution to suit your situation. However, your situation can also change over time. If you are expecting a change that will have a significant impact on your cash flow, such as a drop in income at work or a reduction in household earnings due to pregnancy, you may need to re-address your financial situation to ensure you can continue to make repayments. If cash flow is a concern, refinancing may enable you to access a rate or lending product that is more suited to your current circumstances. For instance, if you require stability of repayments due to temporary life changes, switching to a fixed-rate loan could give you access to a more predictable repayment plan.

To consolidate debt – Some investors will choose to refinance their loan as a means of consolidating other debts such as personal loans and credit cards into one facility. This can benefit investors who are struggling with large interest repayments by potentially enabling them to bring together their debts and access lower interest rates to reduce their overall monthly repayments. However, since home or property investment loans typically have longer terms, you will also need to ensure the benefits of this outweigh your long-term costs by making additional repayments as quickly as possible.

To extend interest-only periods – With recent changes in the lending environment triggered by APRA regulations and the scrutiny of the Banking Royal Commission, some investors are finding it difficult to re-extend interest-only periods on their loan. If you’ve been unable to do this with your current lender after re-assessment of your situation (now standard practice amongst most lenders), you may be able to refinance to another lender. However, it’s important to remember that each lender will have their own unique policies, meaning your eligibility for certain products can differ vastly between different banks. To avoid submitting multiple enquiries, which could have a negative impact on your credit score, speak to a broker with an in-depth knowledge of different lender’s products and policies to help you identify the right product for your situation.

Consider the risks

Before making the decision to refinance your loan, there are also some key factors you need to take into consideration. Most importantly – will the savings you make outweigh the costs involved? Although refinancing may help you access a better interest rate, you will also need to consider upfront costs such as exit fees loan, loan establishment fees, break costs (for fixed rate loans) and, should you need to borrow more than 80% of the property’s value, Lender’s Mortgage Insurance. If your projected profit doesn’t exceed your potential losses, you will need to reconsider your strategy.

In addition, you also need to remember that property appraisals are an inevitable part of refinancing. Afterall, lenders will need to know your property’s worth before issuing a new loan. This is where it’s really important to get your property professionally appraised prior to submitting a new loan application, or to work with a broker who has access to these valuations. If your property has reduced in value, this will have a significant impact on your ability to access better terms on your new mortgage, and your broker may recommend against refinancing.

If you’re thinking about refinancing but don’t know whether this strategy is right for you, our specialist mortgage brokers would be happy to conduct a complimentary review of your existing loans in an obligation-free consultation.