Refinancing your home loan can help you reach your financial goals sooner. It’s also more straightforward than most people think. Given the growing cost of living pressures, many homeowners and property investors have already switched. Here’s a guide to help you understand if refinancing makes sense.
What is a home loan refinance?
Refinancing your home loan means switching from your current home loan to a new one with more significant benefits, such as a cheaper loan with a lower interest rate and beneficial features. You can refinance with your current mortgage lender or a new lender altogether.
An overview: Why refinance a home loan?
A home loan is one of the most significant investments people can make in their lifetime. Whatever your personal or financial situation, ensure your home loan has the benefits and features you need to achieve your goal.
Don’t assume your home loan offers the best value. Interest rates continually fluctuate, and new competitive mortgage products are entering the market. Therefore, investigating refinancing alternatives to your existing home loan makes sense, especially when you could save thousands and even tens of thousands of dollars over the life of your loan.
You can also refinance your home loan to borrow more money, switch to a more suitable loan product, or access extra features like an offset account, repayment flexibility, and a digital wallet. Other benefits could include the option to consolidate your debt, a special offer, flexible loan terms, or lower fees.
The benefits of refinancing
There are a significant number of benefits that come with refinancing your home loan:
- Save money with a better interest rate
- Repay your home loan sooner
- Get better loan features, benefits and flexibility
- Access to equity when you need
- Consolidate debt and streamline payments
Save money on repayments.
The primary benefit of refinancing your home loan is saving money. Your monthly repayments will decrease by switching home loans to one with a lower interest rate. The potential savings of reduced repayments could be substantial.
Home loans with cheaper fees and associated costs will also mean you keep more money in your pocket. With its simple comparison equation, our home loan refinance calculator will show you how much extra money you could save.
Repay your mortgage faster.
Whatever your circumstances, the financial freedom gained from owning your own home outright is a goal of many Australians. You will reduce your overall interest balance by switching lenders or home loans to one with a cheaper interest rate. This will, in turn, reduce the total amount of money you need to repay over the life of your loan.
Refinancing your home loan to a lower rate, while keeping your monthly repayments at the same amount can result in you paying off your home loan sooner.
Access better loan features, benefits and flexibility.
There is no one-size-fits-all home loan. A home loan must fit your personal and financial situation and offer practical benefits beyond the interest rate.
Additional loan features can help you in the short and long term. The right home loan product can include features that provide:
- Increased flexibility
- Streamlined online or mobile banking products
- A digital wallet
- Access to an offset account
- The ability to make extra repayments
- Lower fees
- The ability to split the loan into multiple portions
Unlock equity
Equity is the difference between the overall value of your property and the amount still owed on your home loan. Put another way, it’s the total amount of money paid off on your home loan. As your property value increases, so will your equity.
You can access equity through a cash-out option when you refinance your home loan with a higher loan amount. How you use the money from your equity is up to you. You may choose to access equity to make home improvements to increase your property value, put down a deposit on an investment property or purchase other assets.
Other reasons why you should refinance your home loan
There are numerous situations where refinancing your home loan might be a good idea, including:
- Debt consolidation
- Lengthening or shortening your loan term
- Eliminating lenders mortgage insurance (LMI)
- Boosting your retirement savings with a reverse mortgage
- Taking advantage of a special offer
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How do I decide if I should refinance?
Whether you should refinance your home loan or stick with your current loan can only be determined by weighing up your options. Seek out advice, investigate and compare different mortgage options to find the best solution for you.
Before you decide to refinance your home loan:
- Assess your current financial situation
- Compare options using a home loan refinance calculator
- Understand the pros and cons of refinancing
- Find out the process and any refinancing costs
- Consider the best timing
When should I refinance?
Timing is essential when deciding to refinance your home loan. Factors that influence this are interest rates and your personal credit score.
When your credit score increases
Your credit score gives financial institutions insight into your ability to pay off debt. The higher your credit score, the more reliable and risk-averse you appear.
This is essential for lenders and mortgage brokers when offering home loan applications. Your credit score influences the options available for the total loan amount you can borrow, loan terms and even interest rates.
When can I refinance?
There are so many beneficial reasons to refinance. While knowing when you should refinance is one thing, knowing when you can is another. A home loan is one of life’s biggest expenses. Seek as much advice as possible before deciding to refinance so that your chosen option is relevant to your personal and financial situation. The savings could well be worth the work.
Why shouldn’t I refinance my mortgage?
Qualifying for a home loan in the past doesn’t always guarantee you’ll re-qualify with a new lender. When refinancing your mortgage, you will need to submit a new application as you did the first time.
Ensure that you avoid these common refinancing mistakes by considering all associated factors.
Eligibility
When processing an application to refinance your home loan, different lenders will have different eligibility criteria and terms and conditions. All loan applications within Australia are subject to final lender approval, which includes the lender reviewing your ability to make repayments, Loan to Value Ratio (LVR), debt-to-income ratio, the status of your employment or any other unique financial circumstances that may impact either the lender or borrower.
Personal and financial circumstances
Should your income, proof of deposit, or employment status have changed since your previous application. In that case, it may negatively impact your chances of approval. This is also true if you’ve previously defaulted on home loan repayments. Additionally, you may get declined for a new loan application. In that case, it will be reflected in your credit score and l, possible making the next refinance application more difficult.
High Loan to Valuation ratio
If your Loan to Valuation ratio (LVR) is relatively high, lenders will also consider this when reviewing your loan application. The size of your LVR typically relates to the amount of debt you may have. Therefore, the lower your LVR, the more likely you will be offered a lower interest rate home loan refinance.
Additional fees
Refinancing your home loan may mean you incur fees from your current lender. These could be discharge fees, early exit fees or break cost fees. Your new home loan will also attract its fees for set-up and establishment.
Summary: should you refinance?
Refinancing or switching your home loan can be one of your best financial decisions. It could be the difference in owning your own home sooner. Compare the home loan market to understand if your current lender has the best loan for you.
It’s often easy to assume that once you’ve settled on a new home loan, you don’t need to worry about it much more, especially when making regular home loan repayments in line with your loan term. However, once you’ve had a home loan for a few years, it’s a good idea to consider refinancing.
Refinancing can offer you increased benefits, such as access to equity for property renovations or to purchase an investment property. Or consolidate your debt, gain access to an offset account, have the ability to make extra mortgage repayments, or have greater flexibility.
If you are considering refinancing your mortgage, check out Homestar Finance’s home loan refinancing page for more information. With a range of products available, Homestar Finance is driven to help our customers find the product terms, rates and features that will help you best in the long run.
For more information, contact our customer service team.
Disclaimer: This article is not intended as legal, financial or investment advice and should not be construed or relied on as such. Before making any commitment of a legal or financial nature you should seek advice from a qualified and registered Australian legal practitioner or financial or investment advisor.
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