Once you’ve had a home loan for a few years, it’s easy to think of your mortgage repayments as a part of your budget that you simply have to accept. But if you’ve been feeling stuck in a financial rut, it may be possible to shake things up.
Refinancing your mortgage could be just what you need to transform your home loan from a financial burden to a useful tool that can help you achieve your financial goals.
What is refinancing?
Refinancing a home loan refers to swapping your home loan with another. This often also means switching to a new bank or mortgage lender.
Many Australians choose to refinance their home loans to enjoy cheaper interest rates or lower fees. But refinancing can also offer other benefits, from access to flexible mortgage features, to improved customer service from your new mortgage provider. A refinance calculator can help you find out whether refinancing will help you in the long run.
What to watch out for when refinancing
While it’s easy to get excited about the benefits of refinancing, there are also a couple of risks and catches to consider.
Think about your home loan’s term when you refinance. While a longer loan term can mean more affordable repayments in the short term, you may end up paying more interest in the longer term. For example, if you’ve been paying a thirty year loan for five years, then switch to a second thirty year loan, you may be in debt for thirty-five years in total. That’s an extra five years of mortgage payments and interest charges, which can make your loan cost much more in the long run.
It’s also important to remember that refinancing isn’t free, and that there’ll likely be fees to pay when you switch lenders. Before making the switch, you may want to add up the cost of ending one loan and applying for a new one, and work out how long it would take for any interest savings to make up for this cost.
Why should you refinance?
The right time to refinance is different for everybody, so it’s important to look at your finances and consider your options before making a decision.
A few indicators that it could be a good time to consider refinancing include the following:
Your interest rates haven’t changed
Even if you got the best interest rate you could afford when you first applied for your mortgage, home loan markets change, and what was once the best rate available may no longer be in the top ten. Maybe you’ve just come off a fixed interest rate, and you’ve reverted to a variable rate that’s nothing to write home about. Or maybe you’ve been on a variable rate, but your bank hasn’t passed on the full RBA rate cuts in recent years.
Every few years, it’s worth taking a look at the mortgage market and seeing if there are home loans with lower interest rates that could help you save money on your mortgage. Consider looking beyond the leading banks, as there are some specialist mortgage lenders that offer very competitive interest rates. Keep in mind that many of these lenders operate online only, so you’ll need to be comfortable with managing your home loan online or over the phone.
You have equity available in your property
Equity is the percentage of your property that you own outright, and doesn’t have a mortgage owing on it. If you’ve kept up with your mortgage payments for a few years, and have made some extra repayments, you may have a respectable amount of equity available. And if property prices have been increasing in your area, your property may have grown in value, and you may have even more equity in your property than you realise.
Equity can be used as security on a home loan when you’re refinancing, much like a deposit when you’re buying a home. If you have less than 20% security available, you’ll need to pay Lenders Mortgage Insurance (LMI) on the loan. Because LMI can end up costing thousands, it’s often worth waiting until you’re confident you have at least 20% equity in your property before you look at refinancing.
You’d like a home loan with features that better suit your needs
If your living situation has changed since you first got a home loan, your financial needs have most likely changed too. While in the past you may have had to settle for whatever home loan a bank would approve for you, now you may be in a better position to ask for the home loan that you really want.
Three popular home loan features include:
- Unlimited extra repayments – Putting more money onto your mortgage can shrink the principal you owe, bringing you closer to exiting the loan early and saving money on interest charges.
- Redraw facility – Lets you take any extra repayments you make back out of the loan if you need the money in a hurry.
- Offset account – A savings or transaction account that you can deposit or withdraw money from at will. Money in this account is used to “offset” your mortgage when calculating your interest charges. For example, if you owe $400,000 on your home loan, and have $10,000 saved in your offset account, you’ll be charged interest as if you only owed $390,000 on your mortgage. This can help you pay less interest on your loan in the short term, which can make a big difference in the long term.
You want to improve your property
Maybe you want to downsize. Maybe you need to upsize. Maybe you want to actually start work on that renovation you’ve been talking about for ages. In these cases and others like them, you may need to borrow some more money to buy or build the property you want.
If you can afford the repayments and have the equity to secure the loan, it’s possible to apply for a larger mortgage when you refinance, and to use this money to buy a better property, or to pay for renovations on your current place.
It may also be possible to pay for renovations and other home works by applying for a line of credit, which works similarly to a credit card with a limit based on your equity in the property. For a more involved building project, you may want to look into construction loans, which release money in stages as the project progresses, to help you manage your building budget and save on interest charges.
You have other debts to manage
If you’re juggling maxed-out credit cards and outstanding personal or car loans as well as your mortgage, the interest charges alone could be putting stress on your budget. But if you can refinance your mortgage and borrow some extra cash, it may be possible to clear your other outstanding debts by effectively consolidating them into your home loan.
Consolidating debts this way can help make budgeting simpler, and you may pay less interest from month to month as home loan interest rates are typically lower than those of credit cards and personal loans,. However, the longer terms of most home loans mean you may pay more in total interest in the long run.
Also, if you consolidate your debts, you may also want to think about cancelling those freshly paid-off credit cards and other loans, to avoid the temptation of running up new debts and getting back into trouble.