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Why should you refinance?

Why should you refinance?

If you’ve been reading about how more Australians are refinancing their home loans this year, and how many mortgage lenders have been slashing their fixed and variable interest rates, you may be wondering if you should also think about refinancing your mortgage.

There are many different reasons why people choose to refinance their home loans, with each person’s decision being based on their own unique circumstances. Here are a few popular reasons why some people choose to refinance, to help you work out if one or more may apply to you at this time.

Your loan has changed

Were you on a home loan with a fixed interest rate? Did you get a discount on your variable rate as an introductory bonus offer? Once these offers come to an end and you switch to your loan’s revert rate, you may find that your repayments are nowhere near as affordable as they used to be.

Refinancing to a mortgage with a lower rate could help to keep your repayments more manageable, limiting the impact on your household budget.

You want to consolidate other debts

Do you have outstanding debts owing on credit cards or personal loans? Are the interest charges on these debts eating up a significant chunk of your budget each month?

Refinancing may let you borrow a bit more money in order to pay off these outstanding debts in one fell swoop, effectively consolidating your credit card or personal loan debts into your home loan. Because home loan interest rates are generally lower than those on credit cards and personal loans, you’ll likely pay less in interest each month, easing some pressure on your budget.

However, it’s important to remember that because home loans are paid off over much longer terms than most personal loans and credit cards (decades, compared to months), you’ll risk paying much more in total interest on your smaller debts by following this strategy. You may lower this risk by taking steps to make extra repayments and clear the extra money quickly.

You just want a better rate and/or to pay less

Even if you got the lowest home loan rate available when you first applied for your home loan, it’s unlikely that you’ll still have the lowest rate on the market after a few years have passed. If you still want to keep your home loan’s repayments competitive, every few years you may want to compare the home loan market and see if you can get a better rate.

You could try contacting your home loan provider and see if you can negotiate a discount. Depending on how you go, the next step could be to contact a competing mortgage provider and look at their refinancing options.

You want to be treated better

Unfortunately, not every customer receives the level of customer service they expect. If you’re not a fan of the time you spend on hold when you call your bank, or if their online banking systems are driving you up the wall, you may consider refinancing so you can switch to a lender that treats you better.

You want to use your equity

Once you’ve been paying your home loan for a few years, you’ll likely have built up some equity in your property. This can be especially true if property prices have risen in your area, and your home’s value has increased.

This equity can be used as security when you refinance, and may help you get a lower interest rate. Depending on your circumstances, you could also use your equity to secure a line of credit (basically similar to a credit card with a limit based on your equity), which you could use to pay for renovations, or buy a car at a lower rate than many car loans. It may also be possible to use your equity in one property to help you secure a loan on another investment property, though there are several risks involved with this sort of strategy.  

Your lifestyle has changed

Ever since you first got your home loan, more than a few things may have changed in your life. You may have started a family. You may have started or ended a relationship. You may have lost your job, or gotten a better-paying one.

If the home loan you originally applied for no longer suits your current needs, you may want to think about refinancing to a mortgage that more closely matches your finances and lifestyle.

You want to pay your loan off faster

The sooner you can get out of debt, the less money you’ll need to pay in interest charges. Refinancing to a home loan with a shorter loan term will mean more expensive monthly repayments, but you’ll pay less in total interest on your mortgage.

You could also refinance to a home loan that offers the option of making extra home loan repayments. These can help reduce the principal amount owing on your home loan, which can shrink your interest charges and bring you closer to exiting your loan early.

You want a home loan with more (or fewer) useful features and benefits

When you first applied for your home loan, you may have been limited in what mortgage features and benefits you could access. But by refinancing, you could benefit from:

  • Extra repayments
  • Redraw facility
  • Offset account
  • Loan portability
  • Repayment holidays

Refinancing to a home loan with features and benefits that match your personal financial situation could make a big difference to the level of value you enjoy.

On the other hand, the more features and benefits a home loan offers, the more it’s likely to cost in fees and interest charges. If your current home loan includes features and benefits that you aren’t really using, you may enjoy more value by switching to a more basic “no-frills” home loan.

You’re in financial stress

If you’re struggling to pay your home loan at present, switching to a cheaper loan could be one way to ease some of the pressure. However, because refinancing effectively means getting a whole new loan, this could make it more difficult to get a mortgage approved with a new lender, depending on your exact circumstances.

Consider contacting a mortgage broker or a financial counsellor before choosing to refinance your mortgage, to make sure the decision will be right for your needs. Also, remember that refinancing may involve paying a range of fees and charges – make sure the benefits will be worth the costs.

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This article was reviewed by Finance Writer Alison Cheung before it was published as part of RateCity's Fact Check process.

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