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Refinancing vs. Downsizing
The first question for many retirees is deciding whether to refinance or downsize. If you’ve had the same mortgage for years, there’s a good chance you could save by switching to a better deal. With mortgage rates reaching historical lows over the last few years, it’s a great time to take advantage of the savings.
Downsizing could be an option for retirees who no longer want the responsibility of a family-sized home to upkeep. There might just be too many bedrooms to keep tidy and too much lawn to mow. Selling up for a smaller property works for many people, though it does come with some considerations.
You may be able to sell your current home for a profit, especially if you bought it a few decades ago. However, you may also find that purchasing a new, smaller home may not be as cheap as it once was. Your profit margin may be narrower than you expected.
Many retirees also prefer to keep their existing home for family gatherings, as it provides more space for people to come and stay. Refinancing can help you keep your home, along with any equity you’ve built, and still save on your mortgage.
- Smaller property with less upkeep
- Less room for visiting friends and family
- Lower-cost mortgage
- Reduced property value
- May face difficulty finding a new property
You’re Retired. Should You Refinance?
Ah, the million-dollar question: Should you refinance? It’s impossible to give a general yes or no answer, because each situation is different. First, identify the reason you’re thinking about refinancing. Retirees refinance for many reasons, including:
- To take advantage of a lower interest rate
- To lower their monthly repayments
- To change the structure of their loan
- To access the equity in their home for other purposes, like investing or taking a holiday
- To consolidate finances
If your main goal is to save money, then it’s a question of sums. Look beyond the potential savings associated with switching to a lower rate, and remember to factor in any fees you may be liable for.
Here are a few things you’ll need to include when calculating the costs and benefits of refinancing:
- Amount and time remaining on current mortgage
- Current repayments and interest rate
- Repayments and interest rate for new loan
- Discharge fees from current loan
- Loan application fee
- Appraisal fee
- Break costs if you’re currently on a fixed-rate loan
Although it may seem like a stack of fees, you can still save money by refinancing if the rate is right. You may also wish to discuss your options with a financial advisor, as this can give you a clear picture of how much you can save.
What to Consider When Refinancing for Retirees
Retirees have a special set of circumstances to consider when refinancing. When deciding whether or not you should refinance, you should also think about the following:
Are you currently retired?
You may have less financial leverage if you have already retired. A lack of income may affect your ability to negotiate with lenders, so you’ll need to have your paperwork in order, ready to prove that you can meet the repayments on time.
If you haven’t retired yet but are planning for the future, remember that you may hold more bargaining power while you have a full time job.
What’s the balance on your mortgage?
If you have nearly paid off your mortgage, refinancing may not be necessary. However, if you have a larger mortgage amount, you can still save by refinancing.
What type of loan are you looking for?
You do not have to stick with the same type of loan when you refinance. You may wish to consider the following:
- Fixed-rate loan: offers security and makes it easier to plan financially
- Variable-rate loan: take advantage of low interest rates, but rates could also go up
- Split loan: divide your loan amount into a fixed portion and a variable portion
- Interest-only: Lower monthly payments but a longer loan term
- Principal + interest: Chips away at your principal, shorter loan term
- Line of credit loan: Flexible loan that lets you withdraw funds against your home’s equity and only pay interest on what you use
- Features: Look for loans with features you like, such as redraw facilities or offset accounts.
Total savings: $104,398 over the life of your loan
Pros of Refinancing
There are many benefits to refinancing, including:
- Reduce your interest rate, in turn reducing your monthly repayments
- Switch up your loan type to one that is better-suited to your current financial situation
- Tap into your home equity to free up funds as required
- Keep your family home and save money
- Let a mortgage professional handle the paperwork on your behalf
Cons of Refinancing
Don’t overlook the potential pitfalls of refinancing, including:
- Fees associated with leaving current loan and establishing a new one
- Reduced financial leverage as a retiree without income
- If you decide to downsize after refinancing, you could incur additional costs
- Line of credit loans are not ‘free money’ and will need to be paid back
- Hidden fees for additional features in a new home loan