Why refinance?
- Thread starter Jayro
- Start date
No. The benefit is to increase the limit of the loan and draw out equity built up from rising prices. You can then use the equity to buy other IPs, keep it as an emergency source of funds, etc.
Alex
....and fund lifestyle living expenses - aka LOE
a few reasons...
current lender doesnt offer same rates as new lender
mortgage insurance with lender X is significantly more than lender Y
new lender gives you more than your old one so you can buy the new place
current lender's product mix doesnt suit the deal
I.T. functionality...
Or a lot of sizzle about how great the new lender will be (i.e. go into the steakhouse, smell the steak) compared to the old one.
At the same time you might have a ripper current lender and if so stay put.
But also as noted by alex and having some flexibility down the line.
current lender doesnt offer same rates as new lender
mortgage insurance with lender X is significantly more than lender Y
new lender gives you more than your old one so you can buy the new place
current lender's product mix doesnt suit the deal
I.T. functionality...
Or a lot of sizzle about how great the new lender will be (i.e. go into the steakhouse, smell the steak) compared to the old one.
At the same time you might have a ripper current lender and if so stay put.
But also as noted by alex and having some flexibility down the line.
Hi Jayro
Actually, it’s a very good question!
Many people ‘refinance’ without really understanding why.
The confusion regarding ‘refinancing’ often arises from the misappropriate use of the term:
'Refinancing' usually refers to cancelling an established loan with an existing lender, and frequently (but not always) means discharging the mortgage and taking out a substitute loan of equal or greater value with another lender.
This will usually incur Early Repayment Fees / Deferred Establishment Fees, plus the associated discharge costs plus setting up costs and risk fees to establish the new loan.
Many lenders offer the opportunity to vary the established loan and to increase the loan amount, or to arrange new, separate supplementary loans over the security.
You may also be able to increase the existing loan and to split into sub accounts if your lender has a minimum loan account size, eg a $50,000 minimum but you are increasing by $40,000 (perhaps limited by LVR, or serviceability, etc)
So you can usually still increase your current loan facility to take advantage of your increased equity if that is essentially what you are wanting to do.
However, your existing lender may use a tight serviceability model, in which case you may have to sit and watch all that lovely equity stay out of reach, unless you decide to ‘refinance’ that is, close the loan, discharge the mortgage, and move your borrowings to a lender with a more accommodating approach to serviceability.
The same applies for other reasons to move – eg you may want to build a new house on the land (demolish the old house, or build in the backyard etc) and maybe your lender doesn’t do construction loans – so you may have to refinance
Or maybe you want to subdivide
Or maybe you started out with a lender who would take you – no Genuine Savings, or patchy work history, or a couple of credit defaults etc – but they have a higher than usual interest rate and now that you have been with them for a couple of years, established a good payment history and cleaned up the defaults, you now want to move over to a mainstream, discount rate lender etc
But as per your question – yes, ‘some people’ refinance every few years. Why, is beyond me. Bit like moving house because you get bored. I have a friend who has moved, on average, every three years for the past thirty years. Her mortgage today is significantly higher than the debt she started out with. Each move has cost thousands and each transaction has been for a more expensive house. Refinancing, while not in quite the same ball park as selling and re-buying, can still be a financially extravagant pastime.
As with everything in life, measure twice, cut once.
Cheers
Kristine
By the way - the Loan to Value Ratio is reduced because (a) the loan balance is reduced by repaying the principal of the loan, or (b) the value of the property increases.
The LVR is NOT reduced because the loan is refinanced
eg, you buy a property for $100,000 with a loan of $90,000. You contribute $10,000 plus pay the cost of Stamp Duties, legal fees etc from your own savings. You take the loan out with Interest Only payments. This scenario of 90%LVR as the loan represents 90% of the value of the property held as security for the loan
Three years later, the balance of the loan is still $90,000, however the property has increased in value to $125,000. The LVR is now 72% ($90,000 divided by $125,000 expressed as a percentage)
Three years later, the balance of the loan is $80,000 as you decided to start making principal & interest payments and to pay a bit more as your wages increased. The property is now worth $150,000. The LVR is now 53%.
However, you may decide to buy a new car / buy an investment flat / get married, so you want to borrow another $50,000 to pay for these other things.
Whether you borrow from the existing lender or refinance to another lender, the new situation will be: New balance of the existing loan (OR balance of the new loan) $130,000, Current Market Value of the property $150,000, new LVR is 87%.
So you get the idea? It's a bit like water in a pond, borrowings v equity will find it's own level.
Hope this helps
Actually, it’s a very good question!
Many people ‘refinance’ without really understanding why.
The confusion regarding ‘refinancing’ often arises from the misappropriate use of the term:
'Refinancing' usually refers to cancelling an established loan with an existing lender, and frequently (but not always) means discharging the mortgage and taking out a substitute loan of equal or greater value with another lender.
This will usually incur Early Repayment Fees / Deferred Establishment Fees, plus the associated discharge costs plus setting up costs and risk fees to establish the new loan.
Many lenders offer the opportunity to vary the established loan and to increase the loan amount, or to arrange new, separate supplementary loans over the security.
You may also be able to increase the existing loan and to split into sub accounts if your lender has a minimum loan account size, eg a $50,000 minimum but you are increasing by $40,000 (perhaps limited by LVR, or serviceability, etc)
So you can usually still increase your current loan facility to take advantage of your increased equity if that is essentially what you are wanting to do.
However, your existing lender may use a tight serviceability model, in which case you may have to sit and watch all that lovely equity stay out of reach, unless you decide to ‘refinance’ that is, close the loan, discharge the mortgage, and move your borrowings to a lender with a more accommodating approach to serviceability.
The same applies for other reasons to move – eg you may want to build a new house on the land (demolish the old house, or build in the backyard etc) and maybe your lender doesn’t do construction loans – so you may have to refinance
Or maybe you want to subdivide
Or maybe you started out with a lender who would take you – no Genuine Savings, or patchy work history, or a couple of credit defaults etc – but they have a higher than usual interest rate and now that you have been with them for a couple of years, established a good payment history and cleaned up the defaults, you now want to move over to a mainstream, discount rate lender etc
But as per your question – yes, ‘some people’ refinance every few years. Why, is beyond me. Bit like moving house because you get bored. I have a friend who has moved, on average, every three years for the past thirty years. Her mortgage today is significantly higher than the debt she started out with. Each move has cost thousands and each transaction has been for a more expensive house. Refinancing, while not in quite the same ball park as selling and re-buying, can still be a financially extravagant pastime.
As with everything in life, measure twice, cut once.
Cheers
Kristine
By the way - the Loan to Value Ratio is reduced because (a) the loan balance is reduced by repaying the principal of the loan, or (b) the value of the property increases.
The LVR is NOT reduced because the loan is refinanced
eg, you buy a property for $100,000 with a loan of $90,000. You contribute $10,000 plus pay the cost of Stamp Duties, legal fees etc from your own savings. You take the loan out with Interest Only payments. This scenario of 90%LVR as the loan represents 90% of the value of the property held as security for the loan
Three years later, the balance of the loan is still $90,000, however the property has increased in value to $125,000. The LVR is now 72% ($90,000 divided by $125,000 expressed as a percentage)
Three years later, the balance of the loan is $80,000 as you decided to start making principal & interest payments and to pay a bit more as your wages increased. The property is now worth $150,000. The LVR is now 53%.
However, you may decide to buy a new car / buy an investment flat / get married, so you want to borrow another $50,000 to pay for these other things.
Whether you borrow from the existing lender or refinance to another lender, the new situation will be: New balance of the existing loan (OR balance of the new loan) $130,000, Current Market Value of the property $150,000, new LVR is 87%.
So you get the idea? It's a bit like water in a pond, borrowings v equity will find it's own level.
Hope this helps
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Thanks heaps for that Kristine. Appreciate the detailed post. Thanks for clearing up those points for me. Cheers again to the others for there replies also. When my wife and I couldnt come up with what we thought were reaonable reasons to refinance I figured Id ask the question here and get the right answers that way, instead of us sitting here guessing. Appreciate your help.
Jayro
Jayro
