Interest Rates Are Soaring. Is Now A Good Time to Refinance?

Mortgage owners are facing immense pressure as interest rates continue to climb. The official cash rate went up a cumulative 2.5 percent and according to forecasts, the average variable rate is on track to reach 5.26 percent after the October surge. The rates are going at a pace unseen since 1994.

The Reserve Bank of Australia’s rate hikes coupled with high inflation means more Australian mortgage holders are in a squeeze, forced to cut back on spending and prioritise loan repayments. Even a single point increase in interest rates would mean a 15 percent addition to the average mortgage repayment.

Those who are spending more than they earn are dipping into their savings or using credit to make ends meet. And more people are turning to refinancing to alleviate financial stress.

However, not all borrowers are qualified to refinance. Some are stuck in a financial quandary where they’ve maxed out their borrowing capacity and can’t afford to pay but aren’t able to refinance their loans either. Also called a mortgage prison, this serious issue is affecting three in five mortgage holders today.

Borrowers who do have refinancing as an option are not quick to pull the trigger just yet given the current economic landscape. Does it even make sense to refinance as rates continue to increase?

As it turns out, yes, mortgage holders would benefit hugely from a refinance even with the ongoing interest rate hike. For some homeowners, it’s a huge step toward financial well-being.

It comes as no surprise that an increasing number of people are now open to refinancing their mortgages. According to AMP, 43 percent of homeownersare thinking of refinancing next year. The number of borrowers rushing to refinance is at record levels now in what people call a “refinancing boom”.

Mortgage owners who’ve been looking for a good time to refinance are advised to do it now rather than later. We don’t know how long the upward trend of interest rates will continue but locking in an ideal interest rate now will save you more cash than waiting until things calm down.

Still, experts agree that the right or wrong time to refinance depends on each mortgage owner’s unique situation so it’s best to consider your options and financial standing. Before entering into a new mortgage, know what costs to expect, compare rates, and check the terms of a new loan.

The benefits of refinancing are numerous and some may not be so obvious to the average homeowner. You can use refinancing to:

• Reduce monthly loan repayments
• Obtain a lower interest rate
• Pay off your loan faster
• Increase or decrease the terms of your loan
• Add or remove borrowers from the loan

An even more enticing benefit is the extra cash homeowners can shore up from a refinance.
You can use mortgage refinancing to access your home equity and use the deposit for expenses like debt payment, renovations, or even buying an investment property.

This type of refinancing is called a cash-out refinance and allows you to turn your home equity into cash. The funds are taken from the difference between your new mortgage and your previous mortgage.

Here’s how it works. For example, your home is worth $600,000 today and you still owe $200,000 on your current mortgage. That means you have accumulated $400,000 in home equity. When you refinance, you can turn part of the equity into a loan, say $100,000. That brings your total loan amount to $300,000 as you enter into a new mortgage.

With interest rates and the cost of living surging, it’s a good idea to secure an investment property and have a long-term wealth creation strategy in place. The equity freed up through a refinance can be used to diversify your portfolio. Investment property is not only a hedge against inflation but also a way to take advantage of the rising demand for rentals.

And with the prices of houses and apartments dropping throughout Australia, it’s an even more crucial time to tap into equity and leverage one’s borrowing capacity before interest rates rise further. The good news is plenty of lenders are offering rebates and reduced interest rates to qualified homeowners.

At Geonet Properties, we also work with some of Australia’s most respected names for finance and banking, to assist our clients in finding not just the perfect property but also the right options for payments and financing. If you want to know the options available to you, talk to our team today and find out how you can save money through refinancing.