Considering Refinancing?
Perhaps you’ve been hearing the term “refinance” a bit more in light of the current interest rate discussions.
The term “refinance” refers to the process of replacing your existing loan with one bank to a new loan with another. Generally, people refinance because a bank (or lender) are offering more favourable terms, whether those be smaller monthly payments, lower interest rates or shorter terms. For example, we typically have clients who refinance to lock in more favourable interest rates, or to adjust from floating rates to fixed.
We set out below some of the benefits of refinancing and some things to be mindful of when considering whether a refinance is right for you.
The “Nitty Gritty”
What’s involved in a refinance you ask? Essentially, the new bank/lender will pay off any outstanding amounts on the existing loan and the borrower will begin repaying the new bank/lender, on the new terms as agreed between the borrower and new bank/lender.
To set out the common benefits in more detail:
Change in payments; where a person has more than 1 loan, refinancing can be a way to consolidate all loans into the same facility;
Shorter terms; perhaps you’ve moved up in the corporate ladder and want to pay off your loan faster, refinancing may allow you to secure a shorter term;
Lower interest rate; with multiple banks and lenders, the ability to “shop around” for more favourable interest rates is the predominant motivator of most refinances;
Lower monthly payments; as we have seen with the rise in interest rates over the last year, some people may need to vary the term or interest rates to reduce your monthly outgoings and increase the cash on hand.
Whilst refinancing offers many obvious benefits, there are some things you should be mindful of before taking the leap. Like all financial decisions, it is important to approach the decision with eyes wide open.
When deciding to refinance, take a look through your loan terms and keep an eye out for:
Break fees: many banks will include break fees within their terms and conditions of a loan, including the requirement to pay back any cash contributions the bank gave you on drawdown of your original loan;
Unforeseen costs: in addition to break fees, refinancing can involve various other fees in relation to closing costs and other administrative fees that you may not be aware of at the outset;
Long term costs: we know we said refinancing can offer favourable terms such as lower monthly payments, but you could risk paying back the loan over a longer period of time.
Concluding Comments
Whilst we provide a general overview, we acknowledge everyone’s circumstances are different. The decision to refinance will depend on many factors including your financial goals, current financial status and the nature of your loan.
We stress the importance of understanding what is best for you and your financial position will likely necessitate further discussion.
If this blog has piqued your interest and you want to know a bit more about refinancing, get in touch with one of lawyers today – no obligations, no phone calls or meetings, just legal services made simple