Mortgage Refinancing - The 5 Most Misunderstood Things
Across Australia there are people paying too much for their mortgage or have a mortgage that is unsuitable for their circumstances. This is a consequence of being uninformed. Having the wrong mortgage could be costing you literally thousands per year. One possible solution is mortgage refinancing. Potentially refinancing your mortgage could offer you an opportunity to save money, save time and get your mortgage under control. Mortgage refinancing is essentially switching from one mortgage to another. However there are several aspects to the process that people misunderstand. Here are 5 common misconceptions about mortgage refinancing.
The interest rate is the most important factor
Naturally interest rates are an important factor of any form of credit as they determine how much money you will pay in addition to the principal. For example, over the course of a 30 year mortgage 1% in interest can equate to tens of thousands of dollars. However, as important as interest rates are they are not the only important aspect of the mortgage you are applying for. Many people are stuck in mortgages where they:
- Are unable to make extra payments
- Cannot opt to pay fortnightly
- Cannot have their salary paid into the mortgage account
- Cannot fix their rate
Whilst interest rates can save you tens of thousands of dollars, extra repayments can help you make significant savings as well. Having more flexible terms is another way to help make savings on your mortgage. For example these mortgage terms could save you in the long run:
- Ability to make extra payments
- Fortnightly payments
- Fixed interest rate
Mortgage refinancing cannot only help you lower your interest rate it may also be able to help you gain more favourable terms that can also help you make big savings.
That the cost of refinancing outweighs the benefits
One reason that people avoid mortgage refinancing is the attached fees. Often attached to mortgage refinancing are costs, fees, duties and other incidentals. When these costs are combined it is possible for you to spend over $5,000 refinancing your mortgage. You can refinance for less but $5,000 should be considered an average. Whilst this may seem expensive you can only truly gauge the value of refinancing by comparing the refinancing fees to the potential savings. For example if you have a mortgage of $200,000 over 30 years paying 8% and you refinance to a mortgage with a 7% interest rate, you could save around $49,000.00. In addition to this, overpaying your mortgage by $200 per month you can save around $124,000.00. If you taking these scenarios into account the cost of a $5,000 refinancing fee appears insignificant. It is possible for the benefits of mortgage refinancing to far outweigh the cost. However you should always make sure that this is in fact the case.
The savings from mortgage refinancing can take years to materialise
Another common misconception about refinancing is that with a reduced interest rate you will only start to realise your savings at the end of the second year. Whilst this is sometimes the case it varies depending on the cost of the refinance and the size of the interest rate cut. If you choose a mortgage refinance package in which you are able to overpay you may be able to realise those savings within a year.
Mortgage refinancing is unavailable to people in the first year of their mortgage
Many banks do not allow their customers to switch mortgages in the first year of the term, as a consequence many people assume they cannot refinance in that time. This is not always the case. While many lenders do not allow you to switch to another mortgage within their organisation there is nothing stopping you from switching to another lender.
Non bank lenders are not always more expensive than banks
In is common for mortgage holders to be concerned about switching their mortgage from a â€˜safe' institution like a bank to a non-conforming lender. Naturally you want to ensure that your mortgage is with a reputable institution. Many people view non-conforming lenders as typically riskier and more unreliable. However this view is changing as people realise that there are many reputable non-conforming lenders now in the market. As a consequence the market share of non-conforming lenders has increased significantly over the last few years. This increase in market share represents almost 10% of the mortgage market in Australia and over 25% in countries like the US and the UK.
In reality, banks have the largest market share and as a consequence they often feel comfortable offering less competitive rates because they can rely on the public sticking with them because of their perceived safety.
However it is common for non-conforming lenders to offer more competitive interest rates as they have to try harder to attract the attention of the consumers. If you pay attention to the deals available you should be able to find a non-conforming lender who can offer inexpensive mortgage refinance options in comparison to the traditional lenders.
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 8am - 8pm 7 days a week and our staff will assist you in finding the most effective way to reduce your monthly repayments.