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What is Mortgage Refinancing & When is it Appropriate?

Before considering mortgage refinancing you should ask yourself several questions:

  • Are you paying too much for your mortgage?
  • Do you want the opportunity to pay your mortgage off quickly?
  • Do you want to free up equity in your home?

One possible solution available to you is mortgage refinancing.

Mortgage refinancing is the process of switching your mortgage from one provider to another in order to secure more favourable terms. Technically, the new provider pays off your first mortgage and consequently your mortgage debt is owed to the new provider. The process can be simple and if you find the best terms to suit your needs your dream of becoming debt free can become a reality sooner than you expected.

Staying with your first mortgage

One way of repaying your mortgage is by staying with the first mortgage you get when you first buy your home. Many of the first time buyer mortgages offer you a good way into the market but do not really offer much flexibility. For example many do not allow you to:

  • Make extra payments
  • Take payment breaks
  • Fix your interest rate
  • Realise equity stored in your home
  • Pay in lump sums
  • Pay in your salary
  • Have a line of credit
  • Allow you to opt for weekly, fortnightly and monthly payments

As a consequence of unfavourable terms it is possible that your 30 year mortgage will take 30 years to pay for. This could result in you paying well over 100% of the value of your property in interest alone, in some cases over 200%. This example indicates that unfavourable terms can be as damaging as high interest rates.

Refinancing your mortgage

Mortgage refinancing offers an alternative to staying with your first mortgage. While you can refinance purely to find a cheaper interest rate you may want to also seek better terms for the best results.

The problem with changing mortgages purely for interest rates is that there is no guarantee that in 5 to 10 years time that you mortgage will be good value.

For long term results, changing the terms of your mortgage is more valuable. For example being able to make extra payments will allow you to allocate extra money toward the mortgage. As a consequence this will cut the length of your mortgage, and the amount of interest you pay dramatically. You can compound this further by paying in lump sums if you receive any, or you can even pay your salary straight into your mortgage account, reducing the amount of interest you have to pay.

Through mortgage refinancing it is also possible to gain a fixed interest rate for a significant period of time.

Another common benefit of refinancing is the ability to release equity that is stored in your home. This works if you have paid your mortgage for some years, instead of applying for a personal loan when you need cash, you can release money that is stored in your home. This is a good option as home equity loans tend to be much cheaper than any other form of credit, with the interest rate being similar to your mortgage rate.

Mortgage refinancing is potentially an excellent option for giving yourself the most favourable terms possible for your mortgage and could result in you paying your mortgage off sooner. However, you should endeavour to ensure that refinancing is actually a benefit for you before you switch mortgages.

If you would like to find out if mortgage refinancing is appropriate in your situation then fill in the following form or call Debt Relief on 1300 781 034 and our staff will assist you in finding the most effective debt relief solution.

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