What is Refinancing?
Refinancing is when you apply for a new home loan to replace your existing one. Refinancing may be helpful if you're struggling to meet your monthly mortgage repayments. It can also save you thousands in interest. There are a number of reasons why you may choose to refinance:
Get a better interest rate
If market interest rates drop you may want to arrange a new loan at a lower rate to reduce your interest costs.
Repay or consolidate other debts
Refinancing may be a good option if you want to repay other debts that are at higher interest rates than your mortgage, such as hire purchase and credit cards. But remember, once you've consolidated those debts under your home loan you need to keep your credit card debts and hire purchase commitments under control or you'll end up in a worse financial position.
Extend the term of your loan
You can choose to refinance the remaining loan balance over an extended term, significantly reducing your repayments. But in doing so, you end up paying more interest overall.
Pay off your home loan sooner
You may want to own your home as quickly as possible or you might get a pay rise giving you extra income that you could put on your mortgage. Paying more money towards your home loan will reduce the amount of interest you pay.
Investing
Refinancing can let you access the equity you have in your home. If you switch to a revolving credit facility then this could enable you to invest money elsewhere or renovate your property. Do your research and make sure your investment makes sense. You may be gearing up your primary asset to go into a more volatile investment market, so you must determine your own risk comfort zone. For example, if you borrow a further $100,000 on your mortgage at 9% to put into an alternative investment, you would be looking for a return of over 12% to cover the after tax cost of that mortgage. The alternative investment will probably also have different tax consequences and risk return profile.
