1. Your lender’s rate is no longer competitive
We’ll start with the popular one first. One of the main reasons people choose to refinance their loan is to get a lower interest rate, and put more money back into their pockets instead of paying the banks.
When done correctly, refinancing your home loan could save you thousands over the life of your loan, and free up cash now.
2. You could switch between variable & 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. That is, knowing exactly how much their monthly repayments will be without the possibility of it changing for a set period is worth a slight increase in rate.
Conversely, you may decide you’d like to take advantage of a lower variable rate as you can accept the risk that rates may rise in future.
3. You could be eligible for a home loan with better features
There are some great home loan features around at the moment, and refinancing could offer you the opportunity to take advantage or more flexible features. Some money saving features to look for are:
Flexible repayments: You might want to switch to a home loan that allows you to make lump repayments without fees or open up an offset account to reduce your interest.
Redraw: Allows you to withdraw extra payments if you need cash. Look for a loan offering free redraws.
There are also some pretty cool boutique features, like getting a repayment holiday (a break from repayments), or the loan portability which allows you to 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 car or credit card along with our home loan. Often our car and credit card loans have pretty high interest rates, meaning more out of your pocket.
Refinancing could give you the opportunity to merge your debts and potentially reduce the overall interest you’re paying, streamlining all of higher interest debts into one lower interest debt and reducing your monthly repayments.
The interest rate on a home loan is usually significantly lower than the other types of credit. Helping you to save on interest charges and pay debt off sooner.
5. You could release some equity in your current property
You may be thinking about joining the thousands of Australians that have invested in property, renovating your home or traipsing around Europe on that trip of a lifetime. With your current home usually being your most valuable asset, it only makes sense to release as much of the value in your home as possible.
Home equity is the difference between your home’s current value and the balance of your mortgage. For example, if your home is worth $600,000 and you have a mortgage of $200,000 remaining, your home equity is $400,000. That’s money that can be used to build wealth.
Not so long ago, the only way home owners could access their home equity was to sell up and upgrade to another property. These days, home loans are flexible and it’s possible to get access to the equity in your home without having to sell up. Reviewing your home loan can help you see exactly how much equity is available to you, and refinancing can help you access the equity to use for other things.
What should I consider before refinancing?
Cost of refinancing
While refinancing has some amazing benefits, there are costs associated with refinancing your home loan – costs that may outweigh the potential benefits. Following are two of the main costs associated with refinancing:
Exit fees may apply when you pay out a loan early, usually in the first three to five years of your term. It could be a percentage of the remaining loan balance or it may be a set charge. Check your loan contract for more details. Although exit fees have been banned on new loans taken out after 1 July 2011, they could still apply to loans taken out before this date.
When you refinance, your new lender may charge a range of upfront fees. However not all lenders charge these fees and some may be negotiable.
Let’s have a look at a refinancing example using some numbers to better understand the benefits and costs.
Sue has a $300,000 loan repayable over 25 years. Her current rate is 6.4% and her monthly repayments are $2,006.
If Sue can refinance to a loan with a rate of 5.9% a rate reduction of 0.50%, she can lower her repayments to $1,914, a saving of $92 each month.
Looking at the cost side of things, we’ll assume Sue will pay $1,000 to refinance her loan. In this case it would take about 11 months ($1,000 divided by $92) for Sue to claw back the costs through the savings she makes.
That’s not a bad time frame. If it was to take several years to recover her costs, refinancing may not be worthwhile.
Should you refinance?
We’ve gone through the potential benefits of refinancing, the costs associated and a short example. That’s a lot to take in. When it comes time to make a decision about refinancing your home loan, the best suggestion is to sit down with a mortgage broker you trust to help you go through your options.