What is refinancing?
Refinancing involves taking out a new loan in order to replace an existing one. While you may even be able to refinance an existing loan with the same lender, refinancing also comes with the opportunity to switch to another financial institution with better rates.
You can refinance a car loan, home loan, personal loans, or pretty much any other debt that you may be currently paying off. Refinancing can be worth looking into if your financial situation has changed since you took on the original debt or if it’s since become too expensive or risky.
Does refinancing lower your loan amount?
The idea behind refinancing is to save money, even if your loan amount doesn’t change. What makes this possible isn’t necessarily changing the amount of money you owe, but paying off your existing loan balance with one that offers better comparison rates, such as lower interest.
Say, for instance, that you have an existing home loan that came with a 3-year adjustable-rate mortgage. While things were fine during the initial fixed-rate period, three years have since come and gone and things are now starting to get a bit tighter. Perhaps your interest rates are starting to rise, increasing the overall cost of your principal and interest repayments.
At this point, it may be time to talk to a home lending specialist to see if you can switch to a loan with a fixed and lower interest rate in order to lower your monthly repayments. By refinancing with either your current financial institution or other lenders, you can renegotiate your loan features to make your monthly repayments more manageable.
What are the reasons for refinancing your home loan?
The goal of refinancing is to find a better or more suitable loan than the one offered by your current lender. There are a number of reasons why people choose to refinance, including the following:
Switching to a better comparison rate
Loans with flexible interest rates can be risky because there’s always the chance that your interest will rise. When this happens it can take you much longer to pay off your debt. By switching to a loan with a fixed interest rate, you’ll have the security of knowing exactly how much interest you’ll be charged throughout the life of the loan.
Even if you are currently paying off a fixed interest loan, you may discover that you now qualify for a lower interest rate than that one you’re currently paying. Perhaps market conditions have changed or your credit score has gone up. No matter the situation, lower interest rates can result in significant savings throughout the course of the loan.
Enjoying more or better features
Some customers choose to refinance in order to enjoy features such as flexible repayments, better repayment holiday terms, or the advantages of having an offset account or transaction account linked to your loan.
Refinancing also presents the opportunity to change the term of your home loan. You may want to increase the term of your loan if you’d like more time to pay it off or switch to a shorter-term loan if you want to reach your loan settlement date quicker without incurring early repayment fees.
Refinancing can also offer a way to consolidate all your debts into one payment. Using the loan to pay off personal loans, car loans, or credit card debt may result in a lower interest rate than you’re currently paying and make managing your bills easier.
Converting a Construction Loan to a Home Loan
Home loan refinancing is also an option if you’re an owner-occupier who has recently finished building your own home. At this point, you may want to use a new home loan approval to pay off the credit you used to build your property.
It’s not uncommon for a new owner-occupier to use a new home loan to pay off their remaining construction loan repayments once their project is finished. You may even be able to do this with your existing lender.
Lenders will often take your property value into consideration when determining owner-occupier interest. If your valuation ratio turns out to be better than expected, this can result in cost savings when it comes to a generous home loan comparison rate. For this reason, you may want to avoid switching to a home loan that excludes owner-occupier interest.
Accessing Home Equity
Refinancing your home loan is also an opportunity to access your home equity, which is the difference between what you still owe on your mortgage and what your home is currently worth. If you’ve been paying down your home loan over a number of years, you may have a healthy amount of equity built up.
Some lenders now offer cash-out mortgage refinance loans that allow you to take out a larger home loan and get a cashback payment from your equity. You can then use the cashback payment to purchase an investment property, pay off debts, or achieve other personal goals.
But beware that not all such offers are created equally. Some of these payments can only be placed in an offset account created by the primary applicant, while others only apply given a specific set of lending criteria.
Don’t get fooled by switching to a home loan that will only prove more expensive due to the lure of only one cashback payment. Our brokers are happy to help you comb through the fine print to make sure that the offer really will result in better terms and not extra repayments.