Should You Refinance Your Home Loan? [2021 update]

If you’ve had your home loan for a number of years, it’s likely that your needs have changed. You may have a different financial situation, but your current home loan or current lender may not have the range of flexible features and add-ons that are now available on the market. Perhaps it’s time to refinance?

In the past, most people who took out a mortgage continued with it until they had paid it off. These days, people refinance their mortgage much more frequently. The average duration of a home loan in Australia now is just 4-5 years.

Refinancing involves paying out your current loan with a new one. It may shorten your loan terms and reduce monthly repayments on your loan, so you can afford to make extra mortgage repayments and own your home sooner.

Here we look at some of the reasons homeowners in Australia refinance their home loan:

1. Lower Rate

The most common reason for people to refinance their mortgage is to get a better deal. But be careful you don’t become fixated on interest rate or rate bait.

When you refinance your home loan, you need to consider fees and charges as well as the interest rate. You need to be sure that in refinancing your home loan that you’ll be better off in the long run after taking into account all costs.

Sometimes the ‘lowest rate’ can be confusing and more complex than simply the lowest headline rate. For example a fixed rate loan may have a comparison rate (or actual cost) of almost double the headline rate and end up costing you much more than a variable rate loan.

A lower rate can also end up costing you more if you don’t have the correct structure in place, or you are victim to ‘debt recycling’ which is a common mistake many people unknowingly complete.

This can mean it takes a lot longer for you to finally pay off your debts, and you end up tipping the banks handsomely – tens of thousands, and sometimes hundreds of thousands of dollars extra!

With the cash rate the lowest on record, now is the best time to get professional advice to help pay off your home loan debt sooner.

2. Home Equity

Over recent years in the property market houses have appreciated at a significant rate. For example a home you bought for $300,000 five years ago, might now be worth $500,000.

Refinancing your mortgage with home equity might let you tap into that extra $200,000 equity to cover major costs such as school fees or a family holiday. It can also allow you to renovate your property which could in turn add to its value.

Depending on your personal circumstances or financial position, you may be able to complete a loan application to cash out or draw on equity for the purpose of purchasing an investment property.

3. Renovation

If you carry out renovations, it often makes sense to refinance your mortgage and take out a construction loan so you only pay interest as building progresses.

Once construction is over, it might make sense to refinance your home loan again so that you consolidate the total amount of debts you owe into a loan that minimises your interest bill, simplifies your monthly repayments, all while giving you a degree of liquidity.

4. More Flexibility

Many people only discover the full details about their mortgage when it’s too late. They try to do something and get told by their lender that either they can’t do it, or they will incur a hefty charge if they do.

Many people only discover the full details about their mortgage when it’s too late. They try to do something and get told by their lender that either they can’t do it, or they will incur a hefty charge if they do. Even worse is taking advice from someone at a backyard bbq, someone unqualified to provide specialist advice, or someone who doesn’t know your full situation.

This type of advice can be dangerous and it is best to seek professional advice from a mortgage broker.

A mortgage broker has your best interests at heart and also has a legal obligation to recommend the most suitable loan products and loan provider. They take into account your financial commitments, market conditions, application fees, discharge fees and any break fees, current interest rate, loan period, and loan structure. They can discuss the refinancing process in simple and easy to understand terms, and support you along the way from application and approval – right through to settlement and beyond.

5. Mortgage Stress

Some people find they have borrowed more than they can comfortably repay, and they’re in danger of defaulting, have cashflow issues or might need some debt consolidation of high interest debt like credit cards, personal loans or a more flexible home loan.

There’s no shame in that, with Covid 19 and the last 12 months being one of the toughest periods for most families in Australia. There are tips and strategies available for homeowners during this period if you are still struggling after deferring your home loan repayments.

But don’t suffer in silence. If you’re having trouble paying your loan, need to review your loan term, or switch your variable rate to another product – then talk to your broker about refinancing your home loan or other options to make it more manageable or more affordable.

6. Things to Consider

When comparing home loans, you should take into account the cost of refinancing such as any upfront and ongoing costs associated with exiting your current loan and switching to the new home loan.

Although exit fees were abolished in Australia in July 2011, fixed agreements made prior to this date may still incur an exit fee or break cost.

Other fees to take into consideration include, but are not limited to refinancing costs such as; valuation, settlement and loan establishment fees, as well as paying the non-transferrable lenders mortgage insurance again if you are borrowing more than 80 percent.

Should you refinance? Speak with us to discuss your options and see what’s possible.

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