Inertia among mortgage holders is extremely common. Many are content to sit on higher interest rates (or worse, aren’t even aware what interest rate they’re on) because they think refinancing is too hard, takes too long and may not save them any money in the long run.
However, it does pay to be proactive about your mortgage and finances in general as you potentially end up saving thousands of dollars in interest payments or cut years off the life of your loan.
As a general rule, it’s worth switching if you can get a mortgage that is at least two per cent lower than what you are currently on. However, every situation is different, so you need to weigh up the cost of refinancing and whether it is the best thing for you.
Refinancing enables homeowners to rewrite their existing loan to repay it with a more suitable loan, usually one that has a better rate and more attractive features. Usually the loan is with a new lender, but it can be from your existing lender.
Aussie Toronto franchise principal Julie Levy said many people choose to refinance when rates are on the rise and they want to get a more competitive rate to lower their repayments.
“Some may want to use equity in their house to borrow some additional funds for renovations, or perhaps an investment property,” she said.
One of Julie’s clients, Peter Gentz, had a portfolio of five properties and had found a block of land which he and wife Yvie were looking at for building their dream home. They didn’t want to sell any of their existing properties, but were interested in refinancing their existing loans to free up some cash to use for the new project.
“Being an owner-builder can be very stressful, there are lots of hoops to jump through,” he said. “By using Julie, we were able to streamline everything. She really had her finger on the pulse, she understood what our needs were and she made our life a lot easier.”
Mr Gentz, who started investing in property 26 years ago at the tender age of 20, said he had refinanced many times, but usually through a bank. He said they made the decision to look at their mortgages with a broker as they had become quite complicated and, at times, he wasn’t even sure what interest rate they had been paying.
“Julie was able to search through hundreds of products to find the right one for us,” he said. “It really has made life easier, and for us, peace of mind is something you just can’t put a price on.”
THINGS TO CONSIDER WHEN YOU REFINANCE
Beware of exit fees
Chasing the lowest rate doesn’t always equal the best deal. Ensure you factor in exit fees when considering switching loans, as it may actually be a more costly exercise than first thought.
How high is your LVR? Banks have tightened lending criteria, so a maximum LVR (loan to value ratio) of 90% or lower may be required. A LVR over 80% may incur more Lenders’ Mortgage Insurance (LMI), too!
How much will you save?
It does depend on your individual circumstances. An Aussie mortgage broker can search through hundreds of loans from a wide range of lenders in just a few minutes – research which could take an individual many months.