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Things to consider when refinancing your loans?

Updated: Jun 4

Seven Dwarfs
I owe, I owe. So its off to work I go.

Things to consider when refinancing

A very interesting topic…

The reasons one would refinance are broad. Most commonly people refinance to save loan interest, however with so many credit lenders in the market today and even more credit products, many people are refinancing based on changes and needs of their individual lifestyles.

For example some people will refinance credit cards into low interest credit card products. Others will refinance when they borrow additional funds to complete a new home or investment property purchase.

Some will even refinance margin loans (used for shares) into their home loan as the interest rate is lower while reducing the risk of margin calls. And finally but not least some people will refinance simply because they have had a bad experience from their current lender and wish to punish them by moving to a different service provider.

These are but a few examples of why people refinance however as I mentioned at the start with so many credit lenders in the market today and even more credit products, many people are refinancing based on changes and needs of their individual lifestyles rather than the obvious saving on interest repayments benefits.

Advantages and disadvantages of refinancing:

Advantages of refinancing include:

  • A more tailored product to one’s lifestyle i.e. offset account, split loans

  • Saving on costs. Be them transactional, service fees and interest repayments

  • Convenience and certainty achieved from consolidation

  • Asset protection. Should one wish to spit personal borrowing and investment borrowings linked to different underlying securities

Disadvantages of Refinancing include:

  • Regarding credit card consolidation. It may not be addressing the core issue of uncontrollable spending hence it potentially could make the problem worse in the future i.e. greater debt and one which is even more difficult to repay.

  • Credit reputation if applied excessively. Lenders when assessing ones loans applications will look for past applications. If there are to many applications then the lender may deem the borrower as having poor credit worthiness or financial habits. i.e. not a customer the lender would want.

  • Inconvenience. Lenders have tightened their lending criteria since 2008 and this would increase the justification of serviceability i.e. more paperwork in addition to meetings, applications etc..

  • There may be other more prudent ways for you to achieve your financial needs other than borrowing.

When refinancing is or isn't a good idea:

Refinancing is a good idea when it achieves the following outcomes for the borrower

  • Saves interest expense and  reduces loan repayment duration for the borrower.

  • Makes life more convenient

  • Separates out personal from investment borrowings/repayments.

Refinancing is not a good idea when:

  • It adds another layer of complexity to ones financial situation (leading to more time and financial costs)

  • The core issue of money management i.e. spend more than earn is not addressed.

  • The asset protection of assets is removed by having all assets secured by one lender. This can allow the lender to sell ALL assets it holds security over with the loan.

Refinancing is generally a good idea when you have an existing lending product that can be better tailored to ones needs and goals. The rise and popularity of offset accounts is a good example of this.

Offset accounts allow borrowers to build up extra money in a linked account that reduces the overall calculated interest on the borrowers loan. The money in the offset account can be accesses any time and is generally used in a way that reflects income & expenses of the borrower.  Other situations when refinancing makes sense is when a borrower is seeking to borrow more for investment purposes i.e. a business, shares or investment property. This is to review and reset as well as restructure for greater cost, convenience, clarity and time benefits.

Factors to consider before refinancing:

  • Is refinancing and having lower repayments going to increase your loan duration or shorten it? You may be paying more over the longer term

  • Am I required to bring additional security into the loan, which decreases my asset protection

  • How much will I save, is it enough to justify the time and effort in refinancing, plus will my new refinanced product have improved terms and conditions over the existing.

  • Do I need to refinance? Are there other ways I can maintain what I have now with my lender and still achieve my financial and personal goals doing other activities. i.e. salary sacrifice into super (save on tax without need to borrow and claim interest for tax deductions) same theory applies for income protection insurances,  review income expenses and make greater repayments into the existing loan so it is paid out sooner and seeking professional and specific  financial advice from a certified financial planner.

This post was written by Me, as such they are my personal views and not financial or general advice.

You should always seek independent financial advice when it comes to choices about your personal finances. This is one area of your life where it’s worth paying for it to be done right.

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