One of the biggest mistakes people often make when it comes to accessing finance is feeling they should or must stay with the same lender, on the same terms, for the duration of the loan.
We’ve written before about the ‘lazy tax’, which refers to the potential financial cost of failing to shop around and ensure you’re getting the best deal possible in long-term financial arrangements.
When it comes to home or commercial finance, having an awareness of how your loan structure compares to the market as a whole - and how that market is changing - allows you to make informed decisions and if needed, to move quickly and refinance to take advantage of the best deals.
So what is refinancing? In short, it means replacing your loan with a new one. This could be with your existing lender, taking advantage of current offers they’re promoting, or with a new lender who is offering more favourable terms.
In the process of refinancing, your existing loan is paid off and replaced with the new loan. (It is not the same as a second mortgage, which involves taking a new, additional loan on the same property for which you already had a mortgage, and is seen as a much higher-risk solution.)
The main motivation for refinancing is simple: it can help you save money. This happens in a couple of ways:
You may switch to a lower-interest loan that reduces your monthly principal and interest payments, saving you money in the long-term, or
You may switch to a lower-interest loan and maintain your monthly repayments, instead paying off the mortgage faster and therefore paying less interest overall.
Deciding to refinance your loan can be a calculated, strategic move that you make proactively when your financial situation calls for a change. But it can also be a clever reactive step to adapt to changes in the market and unique, unexpected factors that influence the lending landscape.
For example, the global Coronavirus (COVID-19) pandemic has prompted some unprecedented moves; including the RBA’s decision to cut interest rates to an all-time low of 0.25%, and special initiatives introduced by governments and lenders to respond to the needs of small business owners and other consumers. This situation could not have been predicted but being informed and aware of your options, your position and your preferences allows you to make strategic decisions and react to potential opportunities.
An online mortgage calculator (such as Moneysmart’s Mortgage Switching Calculator) can help you start researching your options, and a broker can provide a valuable health check of your current loan and assist in finding the best option for you.
What to look for when refinancing
If you have an existing loan, you may now have a better idea of which features and benefits are most important to you than when you initially applied for finance. This puts you in a better position to decide what you want from your next lender.
Some of the features you may look at include:
Variable rate or fixed rate: With some experience to guide you and an updated awareness of your financial stability, decide whether it’s more important to have the certainty of a fixed rate over the long-term, or the potential savings when variable rates drop - along with the risks if they rise.
Access to funds: Offset accounts and redraw facilities can both provide unique opportunities and risks. For more on how they differ and what to consider in your financial planning, read our article; Offset vs redraw: How should I structure my home loan?
Flexible repayment options: Would the option to make repayments fortnightly rather than monthly better suit your lifestyle now? Or could you benefit from being able to pay out a loan early with minimal penalty?
Chances are your lifestyle and financial position are not the same as when you first applied for finance. Whether you’ve changed or the market has changed (or both), use your knowledge of what is important to you to decide if a different loan could be more suitable.
Lean on the experts
As with so many aspects of financial management, doing your homework and increasing your knowledge is key to making confident decisions. Speaking to a broker who has an ear to the ground of the market and can guide you through your options can save you a lot of time, effort and stress.
If you’re considering refinancing your loan or just want to discuss how recent changes and market developments might impact you, contact the BFD Finance team today.