Now could be a great time to refinance your loan with a different bank or speaking to your Financial Advisor about negotiating a better rate with your current bank.
Refinancing is an important financial decision that can have a significant impact on your overall financial situation. First up, here is everything to you should know about refinancing.
What is refinancing?
Refinancing is the process of taking out a new loan to replace an existing loan, to secure a better rate or restructure it. In the context of property, this typically refers to taking out a new mortgage to pay off the existing mortgage.
Benefits of refinancing include reducing mortgage repayments, lowering your interest rate, or accessing equity in their property.
Why should I refinance?
One of the most common reasons people choose to refinance is to take advantage of lower interest rates. Interest rates are currently falling in NZ, after the Reserve Bank OCR cut in August 24. Refinancing can allow you to lock in one of these lower rate, reducing your mortgage repayments which can help save you money both in the short and long term.
If you’re looking to pay off your mortgage debt faster, refinancing to a shorter-term loan can help you do just that. For example, if you currently have a 30-year mortgage and have been making payments for several years, refinancing to a 15-year mortgage with a new bank can help you pay off your debt in half the time. This option can help you save money in the long run, as you’ll pay less in interest over the life of the loan.
If you’ve built up equity in your property, refinancing can also allow you to access that equity. Equity is the difference between what you owe on your mortgage and the current value of your property. If you have paid down enough of your current mortgage, you can leverage your current home equity to buy another property.
What are the risks of refinancing?
- Potential for higher costs – refinancing can involve a variety of fees and costs, including going through lawyers again, or breaking a loan term. These costs can add up quickly and may offset the savings you would get from a lower interest rate or lower repayment. It’s important to carefully review the costs associated with refinancing to ensure it’s a financially sound decision! A Financial Advisor can really help here.
- Potential for a longer loan term – while refinancing can help lower your repayments, it can also extend the length of your loan. If you’ve been paying your mortgage for several years and refinance to a new 30-year loan, for example, you’ll be adding more years of payments to your overall debt. This can result in paying more in interest over the life of the loan, so it’s important to consider the long-term implications of extending your loan term. However, again this is sometimes a short-term financially savvy move for people wanting to lower their repayments so they have breathing room.
- Potential for loss of equity if property values decline – if you’ve borrowed against the value of your property through a refinance, for example, and the value of your property drops, you may owe more on your mortgage than your property is worth. This is known as being “underwater” on your mortgage and can be a significant financial burden. Work with a trusted mortgage broker or financial adviser to ensure you’re making the best decision for your unique financial situation.
What are my refinancing options?
The most common type of refinancing is a rate and term refinance, which involves replacing your current mortgage with a new mortgage that has a lower interest rate or different terms, such as a shorter loan term. Another option is a ‘cash-out refinance’, which allows you to borrow against the equity in your property and receive cash at closing. This can be a good option if you need funds for home improvements, debt consolidation, or other expenses.
Refinancing your mortgage can be a smart financial move, but it comes with risks. Before making a decision, it is important to carefully consider your goals, your current financial situation, and the potential costs and benefits of refinancing. With careful research and planning, you can make an informed decision that helps you to achieve your financial goals and secure your financial future.
Next Steps?
Now that you’ve read everything you should know about refinancing, the decision to refinance your loan should be based on your unique financial situation and future goals. It’s important to weigh the potential benefits and risks of refinancing, and to work with a financial adviser to determine if it’s the right option for you.
