Are you getting the most competitive interest rate for your mortgage or business loan?
Refinancing your mortgage can have a significant long-term impact in growing your nest egg. The wrong move will cost you time, stress, and money.
With the mortgage market being highly competitive, there may be a lender that can provide you with a better deal that puts more money back into your pocket. Reinvesting the extra money to grow your retirement fund can make a real difference to your lifestyle.
What is refinancing?
Refinancing refers to switching from your existing loan to a new loan. The motivation is generally to save money, however there may be cases where the original loan is fixed term and a renewal is required at the end of the term.
To make the whole application process worth your time and effort, the new loan should have improved terms such as lower interest rates and greater flexibility.
There are advantages and disadvantages to refinancing. It’s important to consider the good and the bad before proceeding.
Advantages of refinancing
- Save money by switching to a new loan with a lower interest rate.
- Lower monthly repayments and improved short cash flow by increasing the loan term even at the same interest rate.
- You may be able to obtain a loan with greater flexibility and save money with loan features like redraw facilities and offset accounts. You can put extra money towards paying down your debt with the peace of mind that you can access the funds whenever you need it.
- Allows you to change to a different type of loan, for example, variable rate loan to fixed rate loan.
- You can consolidate all your debts into one loan at a more competitive interest rate. This will save you money and makes repayments easier to manage.
Disadvantages of refinancing
- Refinancing is not free. There are closing cost and establishment fees which can be significant. These extra costs may take several years to recoup, and reduce any potential savings from refinancing.
- Reducing your monthly repayments by switching to a longer loan term can end up costing you more in interest and fees, even at a lower interest rate. It also extends the time which you’ll carry this debt.
- Refinancing doesn’t eliminate your debt. You still owe money and paying off debt requires discipline when it comes to spending.
- You are exposed to the current interest rates in the market. Whilst interest rates have been low for a long time, at the time of writing this article most of the banks have increased their rates independent of the Reserve Bank. You may find that lower rates may not be available.
A lower monthly repayment certainly makes managing your cash flow easier. The extra money you save can be redirected to your investments or superannuation to grow your retirement balance.
It’s wise to evaluate your loan once a year as your circumstances may have changed since you first took out the loan.
To get an idea whether refinancing is right for you, try ASIC’s mortgage switching calculator.
I’m retiring in a few years. Should I refinance?
If you’re close to retirement, there are other factors you need to consider before making a decision. Try asking yourself a few questions:
- How many years before you pay off your loan?
- Will you be staying in the same home?
- What is your goal for refinancing? Is it to reduce your monthly repayments, access equity, or save money with lower interest rates?
- How will refinancing affect your monthly budget?
Refinancing can help to reduce your monthly repayments, but this can mean paying your loan well into your retirement. It can add unnecessary financial burden at a time when you not longer have a steady income.
When you are a few years away from retirement, its a lot harder to get your refinance application approved. Lenders will consider you as higher risk because you could be repaying your loan into your 70s and beyond. Generally, if you are able to meet the repayments or have a minimal amount left in the mortgage, it’s often better to stay with your current loan as the costs outweigh the benefits.
Refinancing won’t benefit everyone. If you are near retirement, the situation becomes more complex as there are other factors to consider.
Contact Moiler to discuss if refinancing is a good option for you.
Other articles you may be interested in:
This document has been prepared by Moiler Partners, an Authorised Representative of Count Financial Limited ABN 19 001 974 625; AFSL 227232 (“Count”) a wholly-owned, non-guaranteed subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124 and is for general information only. The presentation has been prepared without taking into account your personal objectives, financial situation or needs. You should assess whether the information is appropriate for your needs and consider talking to a Count Authorised Representative before making any investment decision. The relevant PDS should be considered before making a decision about any financial product. The information is provided as an information service only and does not constitute financial product advice and should not be relied upon as financial product advice. 8 July 2019.