Refinance or play squid game
When you are in a difficult financial situation, and can’t pay your debt, you don’t need to follow the pathway of heroes as in the well-known series “Squid Game”. The solution can be refinancing. However, even this can be as stressful as playing ‘Red Light, Green Light,’ if you don’t know how. A few decades ago, it was typical for potential homeowners to go to their local neighbourhood bank to secure a mortgage. But with rising bank fees and dwindling customer service, many homeowners became disheartened with the big banks and sought brokers offering competitive options and tailored solutions. Enter Beck McLean Finance. In this article co-founder, Josh Beck, covers frequently asked questions he receives about refinancing.
Josh, can you please tell readers more about refinancing?
Refinancing is the process of replacing an existing loan with a new loan that has better terms, such as a lower interest rate or lower monthly payments. Refinancing can be done for various loans, such as mortgages, car loans, and student loans. The goal is to reduce your overall borrowing costs or to free up some cash flow, which can help you manage your finances better.
Refinancing can be a useful option for borrowers who want to reduce their monthly payments, shorten their loan term, or switch to a more stable or flexible loan structure. For example, if you have a mortgage with a high-interest rate, you might be able to refinance it to a lower interest rate, which will lower your monthly payments and reduce your overall borrowing costs.
However, it's important to carefully consider the costs and benefits of refinancing before deciding to go ahead with it. You need to factor in any fees or penalties associated with paying off the original loan to ensure that refinancing is a financially sound decision for you.
Can you tell us more about the benefits of loan refinancing?
I can give you an example:
Someone has had a loan with Bank A for the last three years, but since settlement Bank A has rarely touched base to see if their product is still suitable or how they might be able to help them. Because of this, the person - let’s call them Fred - is no longer satisfied with Bank A’s service and thinks they can get a better deal elsewhere.
Fred has two options now, call every bank to see what their rates and deals are, or reach out to a mortgage broker to assist with this. Even if Fred is willing to do their own research, they have to keep in mind that each bank is seeking deals for their own business and might not actually offer the best product or rate. Fred might think they’re getting a good deal, but could just be getting bamboozled by a smooth talking lending specialist.
Ultimately, it is difficult to compare various banks against one another as the deals being offered are purely from the mouth of a single banker. For example, a customer may be incentivised by a cashback offer from a certain bank that offers a slightly higher interest rate than another, but the conditions of the loan don’t match the needs and goals.
This is where the benefit of a mortgage broker truly shines. Mortgage brokers can compare the various rates, cashback offers, and loan conditions to see what truly benefits a client.
Why might refinancing not be beneficial?
Refinancing a smaller debt is not always logical when the interest rate differential is small. If the loan amount is not very large or more than half has been repaid, even a reduced rate does not guarantee money savings. In some cases, you may spend more in fees to open a new loan and pay off the old one (refinancing). However, the right broker will break these costs down for you, allowing you to make an educated decision.
When refinancing a mortgage there are multiple fees to consider such as: de-registration and re-registration of the title, a discharge cost from your previous lender, and potentially other unforeseen costs associated with changing to a new lender.
After all the fees, it may turn out that you were better off sitting on your hands, rather than entering into a new contract with a new lender. Also, if you extend the term of the loan, the interest overpayment may be greater than the potential benefits.
How can brokers help borrowers to consolidate debt?
A mortgage broker can assist with consolidating debt by following a simple, four step procedure:
1. Sitting down (or zooming) with the client to talk through their current situation to underpin their loans, repayments, other debts, and financial goals.
2. Either propose a solution and next steps on the spot, or if the situation is more complex, come back to the client with a detailed plan and range of solutions to pick from.
3. If the client can see the financial benefit in an option provided and decides to proceed, the mortgage broker will collect all relevant documentation and process the application for approval with the new lender.
4. When the application is approved, a mortgage broker will assist the client in signing all documentation and sending it back to the lender. The broker will organise a settlement date — the date where the old lender is paid out and the loan facility is set up with the new lender.
At Beck McLean Finance we like to add an extra step — touching base. We want to ensure your loan documents are aligned with your initial conversation and goals. We’ll also go the extra mile to stay in touch regularly to review your rate, ensuring you’re getting the best deal possible. Your home loan is like a car, if you don’t service it regularly it’ll cost you more. This step is the hallmark of a fruitful client-broker relationship.
Can refinancing be a good way to consolidate debts?
Refinancing to consolidate debt is when you take out a new loan to pay off your existing debts. The idea is to consolidate all your debts into one loan with a lower interest rate, so you can save money on interest and make one monthly payment instead of several.
Refinancing can be a good way to consolidate debts if you have multiple debts with high interest rates. By getting a lower interest rate, you can reduce the amount of interest you pay over time and simplify your finances by making only one payment per month.
However, it's important to be aware of any fees associated with refinancing, such as origination fees or prepayment penalties. You also need to make sure you can afford the new monthly payment on the refinanced loan.
So, that's the basic idea behind refinancing to consolidate debts. It can be a helpful option, but it's important to carefully weigh the pros and cons with your mortgage broker before deciding if it's the right choice for you. It’s also important to keep in mind that debt consolidation alone won't solve your financial problems. You'll still need to address the underlying issues that led to the accumulation of debt in the first place.
