Is refinancing worth the cost?

One of the most common myths about refinancing is that it will automatically save you money. Although this is true for most when calculating month-to-month savings, you need to remember to factor in the bill for making the refinance happen.

As a rule of thumb, your calculations must show your finances in a better position within 12 to 18 months of refinancing. If you are in a fixed rate (due to the higher exit costs) or are required to pay LMI, this can become incredibly difficult.

Only refinance if you can achieve a breakeven point within 16 months of refinancing, because this is well worth it over the 30-year period of your home loan.

Is your loan size too small?

Refinancing a loan amount of around $150,000 or below is likely to cost you more in the long run, because the costs to refinance in comparison to the size of the loan is likely to outweigh the benefit of switching.

Your strategy

Once you’ve asked yourself these questions, and you’re confident that you’re a good candidate for a refinance, you’ll need to explore your reasons for refinancing to get a clear strategy in mind. Here are some of the more common reasons for refinancing, and some top tips on how to proceed in each case.

Debt consolidation

Borrowers commonly refinance so they can consolidate all of their debts, such as their mortgage, car loans, credit cards and personal loans into one credit facility. While this is a common strategy, there is definitely a right way and a wrong way to go about it.

If you decide to consolidate your debts, you should ask your broker to synchronise but maintain the consolidated debt as a ‘split’ separate to your original home loan.

A ‘split’ has its own statements and repayments, but it has the same interest rate as your main mortgage. This helps you to avoid one of the biggest problems for most people – out of sight, out of mind.

This is what happens when you consolidate your personal debts into your home loan, and then – because the smaller amounts have disappeared into a much larger mortgage – you slip back into bad habits. You continue to pay the minimum due on the mortgage and then run up a new debt on your credit card, and within 12 months you’re right back where you started, but with a much bulkier home loan by your side.

Consolidating debt as a separate split is a reminder of how vulnerable you are to letting credit get the better of you. It also helps you see how quickly you are or are not fixing the problem. Even though refinancing will probably reduce your minimum monthly required payment, you should aim to keep your payments at current levels to make sure you are actually taking advantage of the lower interest rate.

To discuss this article or anything to do with your finances, please call our office today and we will be happy to assist you.

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