UNLESS YOU’VE BEEN living under a rock, you’ll be well aware of the large-scale movements in interest rates over the last six months. Central banks around the world have been increasing rates as a means of dampening down spending habits in an effort to bring inflation under control. With the cost-of-living skyrocketing from a combination of supply chain issues, energy shortages and an increase in the availability of cheap money during the Covid lockdowns, it will be interesting to see if they can negotiate a fine line between slowing demand and pushing the economy into recession.
From a personal perspective, you may be weighing up your refinancing options if you’ve been on a low-rate loan whose fixed period is ending soon or you have a need for additional funding. Will rates continue to increase (making a new fixed period desirable now), or is it best to ride it out and wait for interest rates to come back down again?
Unfortunately, I don’t have a crystal ball regarding the Fed’s actions, but I can suggest there are a few questions you need to consider before making your decision.
Your current interest rate. What is the increase in interest costs you can expect from refinancing? Can you afford the extra outlay?
Your timeframe. How long until your current interest rate arrangements end? How long until your loan will be paid off? These questions will affect your overall cost through the remaining life of your loan.
Your reasons for refinancing. Is this a ‘must have’ or a ‘nice to have’? If the refinancing is avoidable, should you wait for more solid economic signals?
Fees and other costs. What refinancing costs will there be? Refinancing often comes with administration fees, broker’s fees and legal fees among others, which can add a considerable amount onto your true cost. Make sure you take these factors into consideration.
The impact on your credit rating. Will refinancing affect your ability to borrow in the future?
The value of your security. Has your secured asset increased in value since the last financing? Is there a risk of it reducing in the current market, leaving you exposed?
These simple questions will help you set a clearer vision for your refinancing. It pays to discuss this in more detail with your mortgage broker, financial planner or CPA to consider all the factors that can affect your decision.