The purchase of their home is the biggest investment most Australians ever make. At the same time, home mortgage repayments take the largest share of most homeowners monthly income. There is no way to avoid this completely, but there is one way to become proactive and keep monthly repayments to a manageable minimum: you can remortgage and take advantage of lower interest rates, the equity in your home and competitive lending institutions.
How Do I Remortgage?
First home buyers usually have a tough time finding a lender. At a disadvantage, they often have to settle for less-than-ideal terms and interest rates. If you have been faithfully paying off your mortgage for a number of years, though, you are now in a position of advantage. You may find that lenders who turned you down in the past are now eager for your business. The question now is not, "How do I get a loan?" but, "How do I remortgage to my best advantage?" Before you even approach your existing or another lending institution, consider your options:
- Are current interest rates favourable for you?
- What are the pros and cons of fixed versus variable interest rates?
- Can you comfortably make your existing payments or are you struggling?
- Are you going to use some of the equity in your home to renovate?
Whether you're currently paying a fixed or variable interest rate, you may benefit from refinancing, but you will need to factor in your current mortgage lender's exit fees and possible set-up fees charged by a new mortgage finance institution. These are negotiable, but you'll need to do your homework first. Your current lender may be willing to re-negotiate your mortgage with you and may waive any transfer fees. This can offer short term savings, but will you save in the long run? The only way to find out is to research the mortgage market and find the best deal you can.
The debate about fixed versus variable interest rates has been going on ever since the option became available. As yet, there is no one right answer. When interest rates are low, a fixed rate can seem like a good strategy. The catch is that banks are well aware of this and factor it into their calculations. Most experts agree that trying to outsmart the market in this way is a bad idea. A fixed rate may be advantageous if you need a high level of security about your monthly repayments, but variable rates offer more flexibility because banks cannot charge an exit fee on variable rate home mortgages should you decide to remortgage later.
If you are really struggling to make your loan repayments, it may be tempting to take out an interest only loan. Bear in mind, though, that you will only realise a profit on the sale of your home if it increases in value in the future. If the market remains stagnant or values fall, you could find yourself facing a loss when you sell your house. If the reason why you are remortgaging is because you are having serious trouble servicing your existing loan, there are other options to consider:
- You can increase the period of the loan.
- You can look for a deal that offers low introductory rates.
Of course, there are pitfalls to these options, too. If you change the terms of your loan from 20 to 30 years, for example, you will pay significantly less per month, but significantly more over the course of the loan. If you take the best introductory rate you can find, you are likely to get hit harder after the introductory period passes. In both cases, you do have the option of refinancing later, but the decision you make now will have an impact on your level of debt in the future.
If you are refinancing because you need money to renovate or enlarge your existing home, you may want to consider another option. Would it be more advantageous for you to sell your existing house and buy a more suitable home elsewhere? In order to make an informed decision, you will need to both study the real estate market and calculate what your repayments will be if you add a home equity loan into your existing or new mortgage loan. You may also want to look into house and land packages
, which can attract favourable loan arrangements.
As you can see, there is no one answer to the question, "How do I remortgage?" The only way to make an informed decision is to learn about all your options. With so many options available, there is an answer for you and you can use the knowledge you gain today in the future, when you decide it is in your best interests to remortgage again.