What is refinancing and why consider it?
Have you ever thought about what you could do if you had access to the equity in your home? Maybe pay for improvements or renovations, buy an investment property, prepare for a growing family or go on the retirement trip of your dreams?
Whatever the reason, if you’ve owned your home for a while you will have equity that you may be able to access.
Equity is a result of paying off what you’ve borrowed to buy your house, called the principal, combined with the rising value of your house. As debt goes down and value goes up, the difference between the two grows and the more equity there will be.
Refinancing your mortgage is one of the best options to consider if you want to access this equity. Selling your house and downsizing is another but this is more common after kids have flown the nest.
In this blog, we’ll look a some of the most common reasons people have when wanting to free up equity. Being able to do this will depend on your circumstances, and your lender will always consider your situation carefully before giving you the go-ahead - but first, let’s look at what is refinancing exactly.
Refinancing - a definition
Mortgage refinancing means replacing an old home loan with a new one under different terms and conditions. Mortgages aren’t one size fits all agreements and can be customised to fit your lifestyle and financial situation.
The terms and conditions of a refinance will vary from lender to lender, but as long as your home has equity and you have a good track record of making your mortgage payments on time, your lender will consider a refinance plan.
Reasons for refinancing
Lower interest rates
Interest rates go up and down and the ones we have now are still some of the lowest in New Zealand for decades, despite the many predictions they will start to rise.
One of the most common reasons people choose to refinance is to take advantage of lower interest rates. After all, nobody wants to pay more interest than they need to.
If you can get a mortgage rate that’s lower than when you initially took out your loan, then refinancing might be a way of saving money. Not only does it help you save in the long run, it can also help you build up the equity in your home faster because you can pay-off more principal.
Family or lifestyle changes
Marriage, setting up home, moving in together
If any of these life changes are about to happen to you, there’s the option of consolidating your finances to help you qualify for a new loan. Refinancing with your partner or spouse also enables you to include their name on the property. Whether getting married or moving in together, refinancing is always an option to free up equity.
Children on the way or just arrived
Starting a family or growing one are exciting changes but they are also expensive. At this busy time, refinancing your mortgage isn’t likely to be top of mind, however, changes to the size of your family is a good time to review your financial situation to make sure it’s tailored to your changing needs.
You need to carefully consider your options, especially if you are moving to a single income. Having access to some equity may just help you out at an important time in your life.
Increase in income due to a promotion or successful business venture
Just got that promotion or raise you’ve been working towards? Perhaps your business venture is taking off and you’re earning significant profits? Both are excellent reasons to refinance your mortgage.
A higher income improves your borrowing profile, which in turn, will make it easier for you to either pay off your mortgage faster or borrow some more so you can achieve other things on your list.
Divorce or relationship breakdown
Finances have always been one of the most complicated aspects of a separation or divorce. When you and your partner divide your assets, the mortgage and the house you own is likely to be the biggest one to deal with.
In these circumstances, you both need to consider refinancing your mortgage. Reasons to do so would include freeing up cash in the event you are buying your spouse out of the shared house, as well as refinancing to access your home equity and use it to purchase a new property.
It’s always complicated but important to get right so people and families can get on with their lives. It’s also one of the biggest reasons for refinancing.
Investments and major purchases
Using the equity in your home to invest in another property is very common and popular in New Zealand. Buying a property with the intention of renting it out is seen by many as a sound investment. You can buy a second property by dividing your equity across two or more homes, as long as the loan to value ratio (LVR) meets current conditions. Usually, the investment property is then rented and the rental income pays the regular interest payments on that loan.
For some people, refinancing is also a good option if they are wanting to start a business and need extra capital as an initial investment to get going.
Renovations, refurbs, and rebuilds
Large-scale home improvements and renovations are expensive, no doubt about it. Refinancing your mortgage is a great way to pay for these and one of the benefits is they can also increase the value of your home. The best rooms to improve if you want to add value are the kitchen and bathrooms.
If you’re thinking about making a big purchase, then it could be time to refinance, especially if you’ve been paying off your mortgage for quite a while.
If you are retired and have always dreamed of having a luxury item like a nice car, boat, or even going on a major vacation, refinancing could be a way to make it all possible.
You’ve worked hard, paid your dues in the form of mortgage payments, and kept everything in order financially. At some point, you may start to think about how to get some value out of your house, as it is most likely your biggest asset.
While you should take time to enjoy the next chapter of life you’re about to experience, it’s also important to be cautious and wise, making sure you know everything you can before making the decision to refinance.
This review is crucial and while it may seem like a hassle, it’s necessary so that you know the terms you will be entering into and if they will improve your financial situation or make it more difficult.
Refinancing may help you in the short-term so it’s important to also consider long-term effects including being able to pay the interest payments in the long run and decreasing the value of assets that will be passed down to benefactors.
Make sure you’re fully aware of what needs to be done in order to place you in a secure financial situation. If you need somewhere to turn to for advice about refinancing give Taurus Home Loans a call. Our experts know all about how to get the best out refinancing and can manage the whole process for you. We would love to buy you a coffee and have a chat.
Disclaimer: This article is not to be taken as financial advice. Every applicant’s personal situation will vary. We recommend seeking professional advice for your circumstances. All loans are subject to the normal lending criteria.
Posted 30 Aug 2018