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Understanding refinancing

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Refinancing helps borrowers consolidate their high-interest unsecured debt into a low-interest rate mortgage. Refinancing is an excellent way to move to a better loan product, to pay-off high-cost debt or to invest in appreciating assets.

Refinancing happens when a home loan borrower moves to a new loan, which then replaces the original one. Refinancing can be internal with your current lender or your new loan can be with another institution.
Typically a borrower refinances for three reasons: to move to a better interest rate and/or a different loan type; or to consolidate debt in to their mortgage; or to increase their borrowing to fund a renovation or a property purchase.

Many Australians take a mortgage with one lender only to discover a few years down the track that other lenders have lower interest rates on a similar product. So they refinance to save money on their monthly repayments. A borrower might also have a change in financial circumstances, and wish to switch to a fixed rate loan, or an interest-only product, which lowers their outgoings or creates greater security.

Refinancing happens when a home loan borrower moves to a new loan, which then replaces the original one. Refinancing can be internal with your current lender or your new loan can be with another institution.
Typically a borrower refinances for three reasons: to move to a better interest rate and/or a different loan type; or to consolidate debt in to their mortgage; or to increase their borrowing to fund a renovation or a property purchase.

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Many Australians take a mortgage with one lender only to discover a few years down the track that other lenders have lower interest rates on a similar product. So they refinance to save money on their monthly repayments. A borrower might also have a change in financial circumstances, and wish to switch to a fixed rate loan, or an interest-only product, which lowers their outgoings or creates greater security.

Refinancing also helps borrowers consolidate their high-interest unsecured debt into a low-interest rate mortgage. If your property has experienced capital growth, giving you extra equity in the property, refinancing allows you to borrow more than the original mortgage and you can use the extra funds generated to pay-down credit cards and vehicle financing, at a much cheaper rate. It works like this: if you buy a $500,000 property, with an 80 per cent loan valuation ratio (LVR), you borrow $400,000 and have $100,000 as a deposit. When the property is worth $600,000, a lender may be willing to lend you 80 per cent of its value (depending on your income and other financial commitments), or $480,000. So you borrow $480,000, pay-out the old loan of $400,000, and that leaves you with $80,000.

When refinancing allows you to borrow more because of the value of your property, a popular and sensible target for these extra funds is investing in appreciating assets, such as a new property or property renovations. The attraction of using refinancing funds in this way is that your mortgage is generally the lowest rate finance available to most Australians.

When refinancing produces surplus funds from a larger mortgage, the extra cash can also be used to boost superannuation or to buy a portfolio of shares. It’s a low-interest way to invest for wealth creation or retirement planning.

Refinancing is an excellent way to move to a better loan product, to pay-off high-cost debt or to invest in appreciating assets. As a general rule, refinancing should be done for a calculated goal, rather than to generate extra spending money. For this reason it is advisable to seek out the opinion of a financial adviser to ensure the purposes of refinancing make sense for your personal situation. If you are just looking for a better product or a lower interest rate, you should have expert advice from a mortgage broker because they understand the market and the pitfalls of some products. They can also take you through the fees and charges associated with refinancing and calculate whether you will end up ahead or behind.

Contact us today on 1800 927 927.

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