As the Australian economy gets back to normal on the back of the COVID-19 enforced shutdowns and restrictions easing, there is an expectation of interest rate rises in the future but borrowers are still sitting in an enviable position.
The official cash rate is still at a record low, of 0.1 per cent. What that means for borrowers is that this is one of the best times since the 1950s to access money.
If you’ve already got a home loan, then you should consider refinancing, to take advantage of the current low cash rate and to make sure you’re getting the very best deal you possibly can.
However, there are also several other benefits to refinancing.
Better Interest Rates
The first thing to understand is what exactly it means to refinance. Basically, refinancing is just taking out a new home loan on the same property.
The first and most obvious reason to do that is to get a lower rate of interest. Lower interest rates mean lower mortgage payments, which can mean thousands of dollars being saved over the lifetime of your home loan.
A number of lenders offer great introductory rates when you take out a loan with them. However, unlike with other industries, you’re not rewarded by sticking with one lender for the long term. In some cases, it’s the opposite. Those who have not reviewed (or refinanced) their loans can get stuck with far worse deals than necessary.
We must remember that banks and lenders are businesses and sometimes it’s far more valuable to attract new clients than worry about the ones’ you’ve already got. This is where a good mortgage broker can really help you with sifting through the fine print on suitable loans.
Better Loan Products
Back in our parents’ day, it was really just a matter of taking out a principal and interest loan and paying it off over the next 30 years. Fortunately, things have changed for the better and now lenders have a host of great products that can really save you money on your home loan.
A great example would be a 100% offset account attached to your mortgage. An offset account is a transaction account meaning you can use it for everyday things. However, because it is linked to your mortgage it attracts the same higher rate of interest as your mortgage.
More accurately, it saves you interest, in that you effectively only pay interest on the difference between your outstanding loan and your offset account balance.
An offset account can really supercharge your progress if you park your spare money in there and use smart money management techniques.
Access to Cash
If we’ve learnt anything during the COVID crisis, it’s that having some money tucked away for a rainy day is important.
Fortunately, if you’re a homeowner who has owned their property for any length of time you might very well have built up some equity in your property. That’s certainly the case for owner-occupiers and investors in large parts of the east coast, particularly in Sydney and Melbourne who have seen median homes values rise dramatically in the last decade.
By refinancing, it’s possible to access that equity and draw it out as cash. That money can then be used to buy another property as an investment, or as required.
It’s quite possible to access equity and leave it in an offset account. That way it’s not costing you anything but it’s there if you need it. Again, speaking to a mortgage broker will be the best way for you to find out what you can do, given your individual circumstances.
Not all debt is good debt. When you buy a house to live in or as an investment, that’s an example of good debt.
The asset you’re purchasing has a high likelihood of appreciating in value over a long period of time, which will leave you well placed.
Using credit or a loan to buy things that do not appreciate, like a new car or online shopping, will get you into ‘bad debt’. These things will not only depreciate in value almost instantly, but the debt comes with a high rate of interest.
High-interest debt not only weighs heavily on your borrowing capacity, but it is expensive to pay back. An option when you refinance is to roll some of these debts into your home loan and capitalise on the lower rates of interest.
This is a great time to be borrowing money and it hasn’t been this good since the 1950s. With the economy facing a short-term downturn, it’s more important than ever to have access to cash for a rainy day. There’s plenty of additional benefits to refinancing and a mortgage broker will be able to get you on the right track.
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