How do you know when refinancing or fixing the interest rate on your mortgage is the right decision for you?
Here’s what we know.
On the go? Here’s 30 seconds of key take outs:
- Switching investment loan products is always the right decision if the outcome, after considering associated fees and loan features, equals extra cash in your budget.
- Using an experienced mortgage broker is the smartest way to filter through all the noise, and get the right outcome to keep steering you to achieve your lifestyle goals.
- Choosing a loan product is about much more than finding the cheapest interest rate. You must consider all the associated fees and available mortgage features, such as an offset account, too.
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“I took out my loan five years ago. The Reserve Bank of Australia (RBA) seems set on keeping interest rates low and I’ve seen some really attractive interest rates around. Is it a good time to look at refinancing my loan, or fixing my interest rate?”
At our digs at Capital Properties’, this question comes up all the time. Following the monthly 2pm RBA interest rate announcement, our phones often get a good workout!
Right now is a really good time to look at reviewing your property investment loans. There are some really competitive interest rates out there. Some banks are even offering cash back incentives.
So how do you know if you’re making the right decision to move your investment loan, or to lock in a fixed interest rate for a while?
To refinance, or not to refinance, that is the question.
When deciding whether to refinance or fix your mortgage interest rate, the following considerations will help guide you to make the right choice for you.
Refinance consideration #1: how does refinancing tie into my long term plans?
Before you read any further, make sure you’re clear on your short term, medium term and longer term financial goals and how you’re progressing toward them as of right now. Your goals six months ago will be different from the goals you have today. A regular review and refresh of your financial goals is part of your property investor job description.
The sheer volume of loans and loan products on the Australian market are staggering. To cut through all the noise, arrange a conversation with your mortgage broker to discuss your current financial situation. Prepare to cover off the following in your conversation with your mortgage broker:
- Your current short, medium and long term financial and lifestyle goals.
- A snap shot of your current financial situation. Use our free template. You’ll find it at Capital Properties > Resources & Tools > Preliminary Finance Assessment.
Refinance consideration #2: what questions should I ask my mortgage broker?
Apart from reviewing your financial and lifestyle goals and your progress to date, you’ll also need to ask your mortgage broker the following questions:
- What are the best interest rates available today?
- Of those offering the best interest rates, which offer the best loan product features?
- Of those loan choices shortlisted, what are the exit costs?
- What does my current lender offer to fix my interest rate for a while?
- Are there any decent incentives on offer that may make it worth my while to switch lenders?
Refinance consideration #3: how will a fixed rate help me achieve my financial goals?
If you get the timing just right and can land a better fixed interest rate than your current variable interest rate loan, then you’ll gain immediate cash flow benefits. Often the fixed interest rate is higher than the current variable rate, but fixing the rate is your insurance against the variable interest rate going up. In a climate where interest rates are at an all time low, it may be worthwhile considering locking a lower rate in for a while.
Refinance consideration #4: what are the fees associated with switching loans?
If you’re looking at locking in to a fixed interest rate loan, be aware that there is usually a fee involved with locking a rate in and you’ll need to factor this in, along with the period of time you can fix the rate for. Check the break fee too in case you decide to sell your property during the fixed interest rate term.
You’ll need to invest in some time doing some calculations to weigh up the upfront costs and the potential long term savings.
If you’re thinking about switching lenders, check out the exit fee for leaving your current lender and include this in your calculations.
There will be a number of scenarios you’ll need to consider and crunch numbers on.
Can you see the value in using an experienced mortgage broker? A good mortgage broker will be right up to date with what’s on offer across the lending market, saving you hours of trawling through websites and comparing rates and fees.
Refinance consideration #5: think beyond the interest rate.
While the cheapest interest rate may appear to be an attractive option, don’t overlook mortgage features that can support your financial goals. For example, does the lender offer:
- An offset account?
- Redraw facilities? Consider the limits and fees associated with a redraw facility.
- Interest only loan products?
- A fixed interest rate with an offset account?
It’s really important to apply commonsense here too. If overall you’re only going to end up with a .25% interest rate improvement, are the benefits really worth the hassle?
There is not a single approach that will suit everyone. Your circumstances and goals are unique to you. Talk to a qualified mortgage broker to save you both time and money.
Disclaimer
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Free investor tools: Pinnacle Program Support Client Review | Investment Property Loan Review | Refinancing considerations PDF
