Five considerations when refinancing

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It’s a good idea to regularly assess whether refinancing makes sense if you have an existing mortgage or another loan. There are many factors to keep in mind when you go through this process.

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Here are five essential elements to consider when assessing whether exiting one loan and opening another is a wise idea.

1. Do your sums on the way out

It only makes sense to refinance if you are going to end up in a better position financially.

Working this out means you will need to take into consideration any fees and charges you might incur by breaking your original loan.

Loans with a fixed rate of interest may have break costs, whereas loans with a variable interest rate may incur discharge and other fees.

Weigh up the cost of any fees with the potential gains you may make by switching to a loan with a lower interest rate.

2. Work out the cost to refinance

Aside from fees incurred by exiting a loan early, it’s also important to take into account costs attached to your new loan, including application and annual fees.

It’s a good idea to sit down with your adviser to work out if the saving in interest covers all the costs to refinance.

3. Assess which loan is right for you

Refinancing is also an opportunity to check out the different types of loans available and decide which one is right for you.

There are three main loans:

• Fixed interest rate loans
• Variable interest rate loans
• Loans that have both fixed and variable components

The right loan will depend on a variety of factors including your views on interest rates. If you think interest rates are rising, you might wish to fix all or part of your loan. But you may wish to use a variable rate if you think rates are coming down.

When you’re assessing the right loan for you don’t forget to consider features you are looking for, such as redraw, offset facilities or additional loan repayments that can help reduce borrowing costs over time.

4. Reconsider loan values

Think about how much you want to borrow when you’re working out whether now is the time to refinance.

If you decide to move to another lender, it can be a chance to take advantage of a better interest rate and at the same time top up your loan for other purposes.

For instance, you may wish to invest money in your children’s education or purchase an investment property.

Another idea is to use the money to renovate and lift the value of your home. Or you may wish to increase your loan to buy a car, or go on a holiday.

5. Take the opportunity to consolidate your debts

If you’re refinancing it can be a good time to roll up other debts that attract a higher interest rate into one loan.

Adding personal loans or credit card debt to a home loan can reduce your overall cost of borrowing and streamline your finances as you will only need to make one payment. It also means you only pay one set of fees, rather than multiple fees for multiple loans, whi8ch can reduce you overall costs.

However, if doing this means you extend the length of time to pay back your loan, you could incur higher interest charges over time.

Working out whether this makes sense is another great conversation to have with your adviser. At the same time, take into account the effect on your finances of moving from unsecured to secured debt. The consequences of defaulting on a home loan can be more serious than not being able to pay back something like a car loan.

If you only have a few years left on the term of your loan, it usually won’t make sense to refinance to a longer-term loan and pay more interest over time. If you have chosen a variable loan you will usually have the option of paying off the loan faster than its term.

There are many factors to consider when thinking about refinancing. The idea is to take the process step-by-step and work with experts to ensure you end up in the best possible financial situation.

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