Refinancing a loan means that you are taking out a new loan to repay the original loan, either with the same lender or a different one. There are many reasons to consider refinancing, including:

• To take a bigger loan for other purchases, debt repayment, home renovation, etc
• To save money on your mortgage through lower interest rates or monthly payments
• To save yourself from financial challenges

Refinancing can be a great option for those looking to save money because it can sometimes offer a lower interest rate. But you need to take into consideration the cost of refinancing and the possible pitfalls, especially for those experiencing financial difficulty.

Before making the decision to refinance, take the following into account:

• There are upfront costs, in the form of fees and charges, associated with taking on a new loan. These include legal fees, stamp duty, establishment fees, and ongoing fees, which usually apply for the duration of your loan, in addition to interest. If your mortgage is fairly small, it may take you longer for the savings achieved through a lower interest rate to make up for the cost of refinancing.
• A new loan typically comes with a variable interest rate. While the rate might be currently competitive, it may not necessarily remain favourable for the entire duration of your loan. So, it is important that you assess the history of the lender’s rates to identify any trends.
• If you’re refinancing to a mortgage minimisation plan or a debt reduction plan that involves replacing your existing loan with a line-of-credit home loan and a credit card, keep in mind that while switching to a special mortgage plan is not necessarily a bad move, some packages involve fees. These plans might also impose a higher interest rate than a basic home loan. To avoid making a mistake, only refinance to a lower interest rate – never a higher one.
• Consider the amount of equity in your home. If you have been paying the mortgage on your home for the last 10 years, you should bear in mind that the cost of your home was based on the market value at the time of purchase. A current market appraisal may show that your home has increased in value since you purchased it. If this is the case, then refinancing could be the right choice.

Refinancing is a good option for some people, but this may not always be the case. If you are in debt and don’t know the right steps forward you can always seek professional assistance from a Licensed Insolvency Trustee before making a final decision.