We take a look at 5 ways refinancing your home loan could help you:
1. Your lender’s rate is no longer competitive
We’ll start with the popular first. One of the main reasons people choose to refinance their loan is to get a lower interest rate and put more money back in their pockets instead of paying the banks.
When done right, refinancing your home loan could save you thousands of dollars over the life of your loan and free up cash now.
2. You can switch between variable and fixed rates
Another popular reason to refinance your home loan is to switch between a variable rate and a fixed rate. With a fixed rate, some want peace of mind. In other words, knowing exactly how much your monthly payments will be without the possibility of it changing for a certain period is worth a slight increase in the rate.
Instead, you may decide that you’d like to take advantage of a lower variable rate, since you can accept the risk of rates going up in the future.
3. You could be eligible for a home loan with better features
There are some great home loan features out there right now, and refinancing could offer you the opportunity to take advantage of more flexible features. Some money-saving features to look for are:
Flexible refunds: You may want to switch to a home loan that allows you to make no-fee lump-sum payments or open an offset account to lower your interest.
Redraw: It allows you to withdraw additional payments if you need cash. Look for a loan that offers free reworks.
There are also some pretty cool boutique features like getting a vacation payout (a break from payments) or loan portability that lets you take your home loan with you when you move without much hassle.
4. You could consolidate your debt
Many of us have multiple debts like cars or credit cards along with our home loan. Our auto loans and credit cards often carry fairly high interest rates, which means more out of pocket.
Refinancing could give you the opportunity to consolidate your debts and potentially lower the overall interest you’re paying, simplifying all higher-interest debt into one lower-interest debt and lowering your monthly payments.
The interest rate of a mortgage loan is usually significantly lower than that of other types of credit. Helping you save on interest charges and pay off debt sooner.
5. You could free up some equity in your current property
You may be thinking of joining the thousands of Australians who have invested in property, renovating their home or touring Europe on the trip of a lifetime. Since your current home is often your most valuable asset, it only makes sense to free up as much of your home’s value as possible.
Home equity is the difference between the current value of your home and your mortgage balance. For example, if your home is worth $600,000 and you have a remaining mortgage of $200,000, your home equity is $400,000. That is money that can be used to build wealth.
Not too long ago, the only way homeowners could access their home equity was to sell and upgrade to another property. These days, mortgage loans are flexible and it is possible to gain access to the equity in your home without having to sell it. Reviewing your home loan can help you see exactly how much equity is available to you, and refinancing can help you access equity to use for other things.
What should I keep in mind before refinancing?
refinance cost
While refinancing has some surprising benefits, there are costs associated with refinancing your home loan, costs that may outweigh the potential benefits. The following are two of the main costs associated with refinancing:
departure fees
Exit fees may apply when you pay off a loan early, usually in the first three to five years of your term. It can be a percentage of the remaining loan balance or it can be a fixed charge. See your loan agreement for more details. Although exit fees were prohibited on new loans obtained after July 1, 2011, they may still apply to loans obtained before this date.
borrowing costs
When you refinance, your new lender may charge a variety of fees up front. However, not all lenders charge these fees and some may be negotiable.
Case study
Let’s take a look at a refinance example using some numbers to better understand the benefits and costs.
The situation:
Sue has a $300,000 loan repayable over 25 years. Her current rate is 6.4% and her monthly payments are $2,006.
If Sue can refinance a loan with a 5.9% rate and a 0.50% rate reduction, she can reduce her payments to $1,914, a savings of $92 each month.
The solution:
Looking at the cost side, we will assume that Sue will pay $1,000 to refinance her loan. In this case, it would take Sue about 11 months ($1,000 divided by $92) to recoup the costs through the savings she makes.
The result:
That’s not a bad time frame. If it takes several years to recoup your costs, refinancing may not be worth it.
Should you refinance?
We’ve reviewed the potential benefits of refinancing, the associated costs, and a brief example. That’s a lot to take in. When it comes time to make a decision about refinancing your home loan, the best advice is to sit down with a mortgage broker you trust to help you discuss your options.