Refinancing your home loan means closing an existing loan and getting another one, either with the same lender or, more commonly, a new one. Your new lender will pay off your existing loan, and you then make your loan repayments to your new lender.
Reasons to refinance
Money. While there are several reasons people decide to refinance, financial ones are by far the most common.
Choosing a lender who offers a lower interest rate is a great way to instantly save money. Even when interest rates are very low, it can make a noticeable difference. For a $600,000 loan, for example, you’ll save almost $2000 a year if your interest rate shifts from 4% to 3.5%. That’s pretty handy spare change.
Loan features
Low-rate loans are great, but many borrowers choose loans based on other factors too. Lots of people refinance so they can trade in a fixed-interest loan for a variable one (or vice versa).
Many people like the idea of paying a bit more or dropping one-off amounts like tax returns onto their loans, as it can take months and even years off the length of the loan. However it’s quite common for fixed-interest loans to have a rule forbidding extra payments.
For others, the attraction of a special interest-free period might be attractive; these are sometimes offered with new fixed-interest loans.
People might also want to take advantage of features such as offset (you can pay less interest by having your savings count as payments to your loan) or redraw (you can get access to extra payments you’ve made on your loan). Being able to make payments fortnightly rather than monthly is another feature than can result in incremental savings on the interest you pay. Bit by bit, it all adds up.
Take control of debts
Some loans on the market offer the opportunity for people to consolidate other debts, in addition to the existing home loan. With interest rates on mortgages typically significantly lower than personal loans and credit card debts, being able to pay off your other debts and roll it all into a home loan can make a big difference in the long term.
This course of action isn’t for everyone, and rules and conditions can change from lender to lender, so please ask us or a financial advisor for advice before heading down the consolidation path.
The downsides of refinancing
If your loan was taken out before 30 June 2011, it’s likely that you’ll need to pay an exit fee to change lenders. Many fixed-rate loans also have fees for early termination. Many lenders also charge establishment fees and ongoing account-keeping fees, not to mention fees charged on loans with credit cards attached. Make sure the change of loan will be worth it.
And then, of course, there’s the annoyance factor. Automatic payments, new cards, linked accounts … changing banks is just plain annoying. For many people, the headache is not worth the benefits.
Talk to us
At Mortgage Broker Group, we’re constantly evaluating lenders, looking for loans that suit people in different circumstances. Unless you’ve only had your home loan for a couple of years, there’s a good chance that either your needs have changed or there’s a better loan for you in the market. With no obligation and no cost to you, we’d be delighted to talk to you and investigate whether there’s a loan out there that suits you better.
We can then help with the application process and take at least some of the hassle out of refinancing.