What is Mortgage Refinance?
Mortgage refinance is just another name for moving your mortgage to a different lender. Not to be confused with a restructure, which is just changing the structure of your mortgage with your current lender. You could decide to refinance for any of several reasons, common ones being:
- To get a mortgage structure that works best for you. Over the years of your mortgage your personal circumstances are likely to change. When your finances change, so too can your mortgage structure requirements. Often these requirements can be accommodated by your current lender, but they can sometimes require a change of bank. Sometimes to get your mortgage structure right it’s easiest to start fresh with your requirements and find the lender that can best meet your needs, rather than retrospectively tweaking your existing mortgage. Your new bank may have a different product which could take years off your mortgage repayment time.
- To move from a second-tier lender to a mainstream bank. Second-tier lenders are a fantastic option if your circumstances mean you can’t get a mortgage with a main bank. However, they’re ideally a short-term solution until you can get lending with a bank. Due to the higher interest rates charged by second-tier lenders, refinancing to a bank is often best done sooner rather than later, depending on break fees and loan conditions.
- To get a needed top-up on your mortgage if your current bank declines your application. This may mean a temporary switch from a main bank to a second-tier lender to get an interim solution. The higher interest rate for a period may enable you to complete some much-needed repairs that your current bank may not have approved.
What differences are there between the banks that would inform my decision to refinance?
Offsetting your mortgage
Only some banks offer offset mortgage accounts where multiple accounts separate to the mortgage debt account can be used when calculating how much is owed for interest purposes. So, if you had a $500,000 mortgage but had $50,000 in other accounts with the bank, your $50,000 would be used to offset the mortgage and you’d only be charged interest on $450,000 of lending.
Making extra payments
Different banks have different policies and processes regarding extra payments. Some banks allow you to make additional payments of up to 5% of the principal mortgage each year. For many mortgages this would mean the ability to pay additional tens of thousands off should cashflow allow. Others allow only up to $1,000 per month of extra payments. If you have a job that involves receiving substantial bonuses or are expecting a financial windfall, you will likely benefit from the ability to make big lump sum payments or to offset your mortgage.
Increasing your regular payments
Some banks allow you to increase your regular payment amount within a fixed period, others don’t. If you’re in a job that has pay rise milestones or you anticipate a reduction of expenses (i.e. your student loan is due to be paid off, giving you more available income) you may want to have the option to increase your payments. Alternatively, you could use a structure that gives you the options of lump sum payments, floating or offset accounts. These options give you more flexibility and access to your money, whereas increasing payments helps you budget and focus on paying down your mortgage but with the requirement that you always meet the higher payment amount.
Some banks charge account fees, others don’t. If you currently pay account fees, it may or may not be worth moving banks when your fixed period finishes, depending on your mortgage structure requirements.
You’ll note we haven’t mentioned cash contributions or interest rates when it comes to changing banks. When a bank offers a cash contribution it certainly can sweeten the deal but remember there are conveyancing costs and often break fees, as well as the effort of going through the application process. For this reason, while it may sway your choice of bank, it’s not a good reason on its own to refinance. As to interest rates, most mainstream banks rates are within 0.1% to 0.2% of each other. Any break fees would almost certainly negate the benefit of a marginally smaller interest rate, and if you have a mortgage structure with a bank whose service you’re happy with it’s unlikely to be worth the move.
How do I refinance my mortgage?
Use a mortgage adviser! This may sound self-serving but it’s true. Refinancing is all about getting the best provider for you. It would take a substantial amount of your time, energy, and effort to shop around, find out which lenders meet your requirements and then sort out the applications. Using a mortgage adviser drastically reduces the load on you and is usually a service with no extra charge to yourself.
As for the process of applying to refinance your mortgage, it’s the same as if you were applying for a mortgage for the first time. If it’s been a while since you last went through this process with us, here’s a quick reminder of the steps:
- Talk with us about your current situation so we can give you the best advice.
- We the find which lenders would be appropriate and meet your needs.
- You complete the forms and provide the required documentation, as advised and supported by us. At a minimum you will need to provide the bank with proof of your income, assets, spending history of the last three months and 6 months history of all debts.
- We then submit the application or applications to the lender/s.
- When the application is approved, we ensure the mortgage is structured as per your requirements, with a view to minimising your interest costs and getting your debt repaid as quickly as possible to give you other options.
If your mortgage isn’t meeting your needs, or you need any form of mortgage support, reach out and let us help. Call 029 973 7911 or email firstname.lastname@example.org to arrange a free half hour consultation. The mortgage industry can be complex and confusing, you don’t need to find the answers yourself.