A mortgage refinance entails taking out a new loan to replace the old one. Refinancing a mortgage is often done by homeowners in order to obtain more advantageous or favourable interest rates or other loan features that can result in cost savings. So, when you refinance your current mortgage, it’s presumably done for you to get one with better terms.
When you go for mortgage refinancing in Australia (or wherever you’re located), you usually need to choose between fixed and variable loans.
Fixed and Variable Loans – A Comparison
You may have encountered the terms fixed-rate and variable-rate home loans when you first took out a mortgage. However, if your memory’s a bit rusty now, the comparison below should help.
Pros and cons of fixed-rate home loans1
A fixed-rate home loan provides security and stability in the face of an erratic real estate market, which is frequently impacted by factors like political conditions or a variety of overlapping elements. Thus, it can protect you from changing interest rates, allow you to budget accordingly and provide peace of mind. Of course, when done right, it can also mean significant savings.
However, if market conditions become favourable and interest rates go down, the fixed rate you’ve committed to earlier could mean you pay a rate that’s too high. Also, a fixed-rate home loan can make certain features like an offset account or redraw facility inaccessible, so make sure you discuss this with your mortgage refinancing provider. You may not be able to make additional repayments as well, even when you can afford to do so.
Pros and cons of variable-rate home loans
Home loans with variable interest rates are flexible contracts that can be modified in response to changes in interest rates set by the Royal Bank of Australia (RBA) or the lender. It can be a better strategic move to switch from a fixed-rate loan to a variable loan in a market where interest rates are going down. Choosing a variable loan can also mean access to additional features like offset and redraw facilities, bank accounts and credit cards.
However, mortgage refinancing with a variable loan can also mean stress arising from the uncertainty of rates, higher fees from using the aforementioned extra features, and higher repayments due to rate increases.
Get Expert Advice When Refinancing Your Mortgage
Going for mortgage refinancing may seem like an attractive option.
However, you can gauge the soundness of your plan better after discussing your equity and capacity with your advice provider.
If this article has inspired you to think about your own unique situation and, more importantly, what you and your family are going through right now, please contact your advice professional.