Is it time to refinance?

Is it Time to Refinance?

A common misstep many make in finance is the assumption that they must remain with the same lender on the same terms for the entire loan duration.

We've previously discussed the 'lazy tax,' which is the potential financial loss from not shopping around for the best deals in long-term financial commitments.

In home or commercial finance, understanding how your loan compares to the broader market—and how that market is evolving—enables you to make informed decisions. If necessary, you can act swiftly to refinance and capitalize on better offers.

Refinancing fundamentals

What is refinancing? Essentially, it involves replacing your existing loan with a new one. This new loan could be from your current lender, leveraging their latest offers, or from a new lender with more favorable terms.

During refinancing, your current loan is paid off and replaced by a new one. This differs from a second mortgage, which involves taking out an additional loan on the same property and is considered a higher-risk strategy.

The primary motivation for refinancing is straightforward: saving money. This can be achieved in two ways:

1. Switching to a lower-interest loan, reducing your monthly principal and interest payments, thus saving money over time.
2. Switching to a lower-interest loan while maintaining your current monthly payments, enabling you to pay off the mortgage faster and reduce overall interest costs.

Refinancing can be a strategic, proactive decision in response to your financial needs or a savvy reaction to market shifts and unexpected factors impacting the lending landscape. Tools like online mortgage calculators (e.g., Moneysmart’s Mortgage Switching Calculator) can help you explore your options, and a broker can provide a comprehensive review of your current loan and assist in finding the best solution.

Considerations when refinancing

With an existing loan, you likely have a clearer understanding of which features and benefits are most important to you compared to when you first applied for financing. This knowledge positions you to better assess what you want from your next lender.

Consider the following features:

• Variable vs. fixed rates: With experience and an updated view of your financial stability, determine whether the certainty of a fixed rate or the potential savings of variable rates—along with their associated risks—is more beneficial.
• Access to funds: Offset accounts and redraw facilities offer unique opportunities and risks. For more details, read our article: Offset vs redraw: How should I structure my home loan?
  • Flexible repayment options: Would fortnightly rather than monthly payments suit your current lifestyle? Or could you benefit from the ability to pay off a loan early with minimal penalties?
  Your lifestyle and financial situation may have changed since you first applied for financing. Whether these changes are personal or market-driven, use your insights to decide if a different loan might be more suitable.Rely on the expertsIn financial management, thorough research and knowledge are crucial for making confident decisions. Consulting with a broker who understands the market and can guide you through your options can save time, effort, and stress.If you're considering refinancing or want to discuss how recent market changes could affect you, contact the BFD Finance team today.