As market interest rates continue to fluctuate due to Brexit, and new buy-to-let laws, homeowners seek to refinance their mortgages. Refinancing applications account for a significant majority of mortgage applications every month. This is because many homeowners try to take advantage of the low mortgage rates to restructure their finances.
However, it is important to know whether your refinancing options are in your best interests. There are other salient factors to consider besides favourable mortgage rates -which could change any moment.
These factors should help you to decide when considering an application for a mortgage refinance:
- Breakeven point
Implementing a refinance usually comes with a penalty. For example, if you are locked into a fixed rate mortgage and plan to switch to a more accommodating variable rate, breaking the terms of your existing agreement will cost you financially.
A breakeven point is the most fundamental consideration to make before you proceed. It represents how quickly you can recover from the penalty accrued in the refinancing process. It makes no sense to switch if you are still recuperating by the time rates rise again. The breakeven point is easy to calculate, but there are other factors that influence a refinance decision.
- Your current loan type
The type of existing loan you have should determine whether you need a mortgage refinance. Home-buyers already on a variable rate mortgage, who believe rates are going to climb, may want to lock quickly into a fixed rate before it does. On the other hand, if rates are falling, there might be no need to switch mortgage types.
For buyers on a fixed rate mortgage, a continuous drop in interest rates may spur them to break their existing plan and refinance towards a more favourable variable mortgage agreement. It all depends on how informed you are about market forces and conditions.
- The term of your mortgage loan
If you are on a long-term fixed rate mortgage and interest rates are on a steady decline, it may be wiser to consider refinancing your loan to take advantage of the new rates. However, be wary of the financial penalty involved.
On the contrary, if you are on a long-term variable rate mortgage, continuous fluctuations in the market means that you have to deal with market forces (and keep adjusting family expenses) for a longer period. It is wise to consider a shorter term or locking into a fixed mortgage at a suitable rate.
- How long do you plan to live in the property
Another important factor to consider is how long you intend to live in the property. If you’ll be moving out in a few months, it won’t be necessary to rush into a refinancing plan. It is financially smarter to let the current loan run its course.
However, if you live in your ideal family home with no plans to leave for the next 30 years, a refinancing plan may be needed when interest rates become more attractive. Ensure you calculate your breakeven point before taking the next step.