A mortgage refinance is the process of taking out a new loan, and using the proceeds to pay off your old one. Generally, you would do this to make a change in the structure of your debt in order to get more money, a lower monthly payment, or a shorter pay-off schedule.
You would trade-up your mortgage for the same reason that you would trade-up your job, car, or living arrangement-because circumstances change. What you need out of a mortgage today may be different from what you needed five years ago.
There are many reasons why people refinance their home loans including:
- The option to roll all your debts into one.
- To take advantage of a cheaper interest rate or lower fees.
- To take advantage of other features offered by other products.
- To switch from a fixed to variable rate loan, or vice-versa.
- To access the equity in your home to use for renovations, holidays, other investments etc.
When to refinance
Refinancing can be useful and financially rewarding but it can also carry risks. It takes time and costs money, so before you decide to change to another lender, ask yourself if it is really the right thing for you.
- Are you happy with your existing lender? Have they been professional and helpful in all the dealings you’ve had with them?
- Are you happy with your existing loan? Is the interest rate comparable to other lenders? Could you use some extra features offered with other products?
- Has your financial situation changed? Maybe you’ve started a new job or become unemployed.
Potential costs and implications
Refinancing an existing loan comes with many fees and charges. These include:
- Application, establishment and handling fees when applying for your new loan. These can be substantial.
- Early settlement fees on your existing loan. These vary depending on your lender but many fixed rate loans have significant penalties for early repayment.
- Valuation fees; still required by some lenders.
- Mortgage insurance. Required by many lenders if the loan is more than 80% of the property value.
- Discharge fees on your existing mortgage and registration fees on your new one.
- Stamp duty.
Many people also get caught out with the hidden cost of additional interest payments. If you only have ten years left to pay on your existing home loan and you refinance, taking out a twenty year loan instead, do not forget to consider the additional interest that will be charged over the extra ten year period your new loan runs for. These additional amounts can soon add up.
If you have decided that refinancing is the answer for you, or wish to discuss your personal situation with one of our lending specialists, contact us any time.