Is Now a Good Time to Refinance?
Refinancing your mortgage essentially means repaying your current mortgage and taking out a whole new one - often with different terms.
This could mean staying with your current bank, or switching to a new lender who’s offering a better deal.
Refinancing a mortgage can be a very smart financial move - it can save you many thousands on interest and/or help you get mortgage-free faster. Timing, however, is crucial…
When considering refinancing, there’s more to be aware of than just the opportunity to save big with a lower interest rate. There’s often costs to pay - including a potential break fee charged for repaying your mortgage, potential repayment of any cash incentives you were given when you first took out your mortgage, and other exit/discharge fees.
Here’s what you need to know to determine if now is the right time for you to refinance.
When to Consider Refinancing a Mortgage:
1. Lower Interest Rates
If current interest rates are significantly lower than your existing rate, refinancing can reduce your monthly payments and save you money over the life of the loan. Even a small decrease in the interest rate can lead to very substantial savings.
2. Improved Credit Score
If your credit score has improved since you took out your original mortgage, you may qualify for a better interest rate! A higher credit score typically results in lower interest rates, which can lower your monthly mortgage payments and reduce the total interest paid over the life of the loan.
3. Change in Financial Situation
If your income has increased or your debts have decreased, refinancing your mortgage can help you get better terms. Improved financial stability can make you a more attractive borrower, potentially leading to more favourable loan conditions.
4. Home Equity
If your home’s value has increased, you may be able to refinance to access some of that equity for renovations/home improvements, debt consolidation, or other expenses. This is known as a cash-out refinance, where you take out a new loan for more than what you owe on your current mortgage and pocket the difference.
Steps to Refinancing:
1. Evaluate Your Current Mortgage
First, make sure you understand your current loan terms - including the interest rate, your remaining balance, and any prepayment penalties (break fees, repayment of cash incentives, etc). Knowing these details will help you calculate the true benefit of refinancing (savings versus costs).
2. Compare Mortgage Lenders
Shop around for the best rates and terms. Consider using WealthHealth as your mortgage broker - we’ll do all the shopping around for you, and negotiating to find the best deal. We can also let you know what sort of cash incentive you could be given by a new lender as a bonus for ‘moving’ your mortgage to them. We have access to 16+ different banks and lenders and can help you navigate the entire refinancing process, saving you time, stress and paperwork!
3. Calculate if it’s Worth It
As we’ve touched on above, refinancing your mortgage involves closing costs. To give you an indication up-front, these are generally estimated to be 2-5% of the loan amount.
Will the savings you’re refinancing for (plus any cash incentive you might be offered from a new lender) outweigh these costs? Online calculators can help you estimate your ‘break-even point’ - the time it will take for your savings to cover the closing costs. Remember, we can do all these calculations for you and present our recommendations to you - get in touch with our mortgage brokers today!
4. Apply for the new Mortgage
If you’re comfortable the benefits outweigh the costs (short or long term), go ahead and submit your application with the necessary documentation, such as proof of income, credit reports, and details about your current mortgage. The lender will evaluate your application and creditworthiness. Again, our mortgage brokers can take care of this step (multiple steps!) on your behalf.
5. Close the Old Mortgage
Review and sign the new loan documents. Your new lender will pay off your old mortgage, and you’ll start making payments on the new loan. Always make sure you understand all the terms and conditions before signing. As professional mortgage brokers with over 20 years’ experience, we can explain everything in plain English to you.
Refinancing your mortgage can mean big benefits - but get the timing wrong, and the costs could outweigh the savings, or you could do yourself out of better future savings by moving too soon.
Our blog is not intended to be taken as personal advice and is for informational purposes only.
Before acting on this information, contact our mortgage broker to ensure it is suitable for your circumstances.