The ongoing reduction in interest rates is a boost to refinancing. According to research from finder.com.au, 35 per cent of all owner-occupied home loans financed each month are now refinanced, with the ratio expected to increase this year.
Refinancing presents a number of opportunities borrowers who have had a loan for a number of years may not necessarily be aware of. These people might need as much help as a first-home buyer, and using a mortgage broker is a smart first step.
Refinancing is the replacing of a home loan with a new one, over the same asset, and it is done by three groups: those who want a cheaper or better home loan; those who want to retire consumer debt; and those who want to use equity in their property to fund an investment property or a renovation.
The first group has real opportunities right now. If you got a mortgage seven or eight years ago, your once competitive loan could now be in the middle of the pack: you could be paying 5.4 per cent, while the market-best variable rates have fallen to around 4.4 per cent or lower.
On a $400,000, 25-year loan, the people with 5.4 per cent mortgages are paying around $230 more a month than those with a 4.4 per cent mortgage.
It isn't just interest rates that trigger refinancing. Your original loan may have lacked features, such as an offset account or line of credit – features that help your wealth strategy.
Consolidation of consumer debt is also worth looking at.
The cost of store finance and credit card debt has not really fallen in line with mortgages, and if the value of your property has risen in the past few years, it's possible to refinance to a larger loan and release cash to pay-off consumer debt. The basic equation is that you use the mortgage at 4.4 per cent, to eliminate debt that's costing you 18 per cent. This can be a massive saving for a household.
For wealth-building, refinancing is useful for funding renovations and further property purchases.
Let's say you bought a property for $500,000, with a $400,000 loan. Now the loan is down to $300,000 and the property is worth $600,000.
If a lender is prepared to write a home loan to 80 per cent loan valuation ratio (LVR) on your property, the new loan of $480,000 pays-out the original $300,000 and leaves you with $180,000 to assist in the purchase of an investment property. This is how extra repayments into the mortgage, and buying well, can increase your opportunities.
Refinancing is now one-third of the owner-occupier mortgage market, so it's popular. But I'd suggest some warnings: every time you use refinancing to release cash, you are increasing your debt.
Be aware of this and know your affordability equation. Secondly, refinancing should be used for a wealth strategy such as reducing expensive debt or buying/building appreciating assets.
You're a long time repaying a mortgage so make sure it counts for something. Good Luck!
Article written by Mark Bouris and originally published on smh.com.au.