Refinancing is a choice that homeowners make if they believe their current mortgage may be holding them back from financial freedom.
Ideally, homeowners choose to refinance with the goal of finding a loan with a better interest rate, equating to less debt. Or, may earn more nowadays and would like to pay the loan off more quickly.
Refinancing involves paying out your current loan with a loan. This could be with your existing lender or a new one.
Benefits of refinancing your mortgage can include:
1. Attaining a better interest rate
Switching to a loan with even just half a percentage point in reduction could save you thousands or tens of thousands over a 20 or 30 year loan period.
2. Clearing your debt in a shorter time
If you refinance, you also have the ability to increase your monthly repayments so you can pay off your loan quickly and own your own home sooner. Extra lump sums on regular additional repayments can help you cut many years off the term of your loan.
Another way to clear your debt quicker is by paying it off as if you have a higher rate of interest. If you get a loan at the lowest interest rate and add a couple of percentage points onto it. If rates go up you won’t even notice and better still, you’re paying off your loan quicker and saving yourself coin.
Another strategy is paying off your loan fortnightly instead of monthly. Why? There are 26 fortnights in a year but only 12 months. So you’ll effectively be paying off 13 months debt in a year rather than 12.
Vice versa, you can lengthen your loan by paying smaller repayment amounts if you’d like to spend money elsewhere.
3. Using the equity to renovate
Equity is the difference between the market value of your property and the amount you still owe on your home loan. By refinancing, you have the ability to use this equity to add value to your home.
By discussing your plans with a lender, you’ll be able to gain an understanding of how much you’re likely to be able to borrow for renovations.
Depending on the size and scope of your project, you can also get funding for your renovation by topping up your existing loan or reviewing your current loan to see if there’s a better choice out there.
4. A new loan that better fits your lifestyle requirements
When the Reserve Bank of Australia (RBA) raises its interest rates, lenders generally increase mortgage repayments. So if you have a variable rate, and you’re exhausted with keeping up with the RBA, it may be a good idea to refinance and apply a fixed interest rate. You won’t have to worry about fluctuating interest rates.
You may also want to get a new loan that includes features such as flexible repayments, redraw facilities and account splitting.
If you’re struggling to manage multiple loans, for example, your car loan, home loan and credit card, you can consider debt consolidation which involves rolling all of your existing debts into one loan. The only pitfall here is if the interest rates or fees in the new consolidated loan are higher than they were in the original loans.
How much does it cost to change home loans?
Before you decide on refinancing, you must consider the long term financial outcome. There’s no point refinancing if you’re going to lose out. When you refinance under the right circumstances, loan refinancing can be very beneficial.
The cost of changing home loans can vary immensely. It’s a good idea to compare multiple home loans to ensure the long term savings outweigh the short term costs of switching over.
Here are some average costs associated with refinancing:
Like anything, it’s important to read the fine print of both your new and existing home loan contracts. Look out for things like establishing fees for the new loan as well as closing fees for your existing loan. Without doing the right research, you may incur unexpected costs and cancel out expected savings.