Reasons to consider refinancing
When you first took out your home loan there’s a good chance you spent time researching a number of loans to check that you secured the mortgage that best suited your needs at a competitive rate.
That’s a sensible approach.
However it also makes good financial sense to review your home loan from time to time (ideally at least annually) to check that it is still continuing to meet your needs with the features you need or want, at a competitive interest rate.
Today’s mortgage market is very competitive. New types of loan features and packages are becoming available; loan interest rates vary widely too – and your current loan may not be keeping pace.
In our ever-changing lives, you may find that your loan no longer offers the features and flexibility that you need. Or, perhaps you have built up some equity in your home that you would like to tap into to fund home renovations or an investment property.
All these circumstances make it worth thinking about refinancing.
This guide is designed to provide information to help you understand what is involved in refinancing your home loan – and decide whether it is the right step for you. If you’re unsure, it can help to speak with someone you trust, like friends, family members or an expert Aussie Mortgage Broker.
Refinancing can help you achieve important goals
Switching to a new loan or lender can be an important step in helping you achieve financial goals. Let’s take a look at some of the most common reasons for refinancing a home loan.
Save money with a lower rate
Whilst refinancing has the potential to put money back in your pocket, the loan interest rate should never be the only factor to consider when choosing a home loan.
With a wide range of lenders and loans to choose from, chances are you may be able to secure a more competitively priced loan with a different lender. Or, you may be paying for features you don’t need or use on your current loan.
If you think you’re paying too much, contact an expert Aussie Mortgage Broker, who can compare hundreds of loans to see if you could save money by refinancing.
Access more – or improved, loan features
If your circumstances have changed, or if you’ve had your home loan for a few years, refinancing can offer you the chance to take advantage of more flexible features.
An expert Aussie Mortgage Broker can advise on the features best suited to your needs, but some money saving features to look for are:
Flexible repayments – the option to pay a little extra off your loan when you have some spare cash helps you cut time and money from your loan
Redraw – lets you withdraw any extra repayments if you need the cash. Look for a loan offering free redraws that can be arranged over the phone or online
Flexible rate options – switching your loan between a variable rate and fixed rate, or splitting your loan between the two helps you manage your mortgage in line with interest rate movements
Portability – the ability to take your loan with you when you move can make life a lot easier, and save on fees, further down the track
Streamline debt management
‘Debt consolidation’ is the process of folding high interest debts like a credit card and personal loan into one low rate loan – usually your mortgage. It means you have just one set of paperwork to manage, one loan to pay and it may also offer big savings.
The interest rate on a home loan is usually far lower than the rate on other types of credit. This lets you save on interest charges and helps you pay off the debt sooner.
However debt consolidation can turn a short term debt – like a personal loan, into a long term one (your mortgage). Unless you aim to pay off the new, bigger home loan as fast as possible, consolidating your debts could mean paying more interest in the long term. Making extra repayments is a great way to get ahead with your home loan and make the most of debt consolidation. Use Aussie’s Budget Planner Tool to work out where you can trim spending to free up cash for additional loan payments.
An expert Aussie Mortgage Broker can give you a clear idea of how much you could save by consolidating your debts – along with some useful tips on how to pay off the overall balance sooner.
An opportunity to invest using home equity
‘Home equity’ is the difference between your home’s value and the balance of your mortgage. So, if your home is worth $600,000 and you have $200,000 remaining on your home loan, your home equity is $400,000. That’s money that could be used to build your wealth.
Refinancing your home loan can be a great way to access home equity to invest in other areas such as investment property, shares, or managed funds. Using borrowed money to invest is known as ‘gearing’. It’s a strategy that can provide benefits but it also carries risks – these are summarised in our table below. It is important to speak with your financial advisor or accountant to determine if gearing is the best option for you.
A chance to achieve personal goals
Your home equity doesn’t have to be used for investing. It can also be used for a wide range of purposes like paying for the kids’ education or funding home improvements e.g. building a pool, or even going on a holiday. Talk to an expert Aussie Mortgage Broker to see how refinancing could help you achieve your goals.
Borrowing to invest
|Borrowing to invest gives you greater ‘buying power’, allowing you to buy a better quality property or invest when you are ready rather than waiting until you have accumulated sufficient funds||Even if the investment falls in value you will still have to pay off the loan|
|Magnifies your investment returns if the investment rises in value||Magnifies your losses if the investment falls in value|
|The interest charged on money borrowed to purchase investments is usually tax deductible||The investment returns should be higher than the loan interest rate for this strategy to provide long term benefits|
|Your investment may provide additional income||You need to be able to meet loan repayments even if the investment fails to generate regular returns|