Refinancing your home loan: why you should do it & how to get it right
With interest rates currently below 3%, now is the perfect time to think about refinancing your home.
The mortgage loan market in Australia is incredibly competitive.
Lenders are vying for your business, trying to outdo each other with the cheapest mortgages, lowest interest rates and the best features.
If you are looking to refinance, this puts you as a borrower in an ideal situation. If you are considering refinancing your home loan, there can be a lot of benefits to you. But you need to know what to look for and what to consider when refinancing a home loan.
Benefits of refinancing a home loan
Saving money
The most common reason for people to refinance their home loans is to save money. A cheaper home loan usually means a loan with lower interest rates or fewer fees. Some offer both.
If you get refinancing on your home loan ideally the interest rate would be lower. That will end up saving you a lot of money over the term of your loan and also translate into lower mortgage payments.
But if you have been paying your home loan for a couple of years, refinancing can also structure your home loan to another 30 years. That means you will pay longer for the refinance loan than you would have for the original home loan.
You could end up saving a lot of money on your monthly mortgage, but over the period of the loan you would end up paying a lot more towards interest because the term is so much longer.
The ideal refinancing home loan would offer you a lower interest rate but keep the term of your loan the same. That way you will save on your monthly payments and on interest over the term of the loan.
Faster mortgage repayment
If you refinance your home loan at a lower interest rate but keep your mortgage payments the same as it used to be, you will pay off your home loan a lot faster. With refinancing at a lower interest rate your monthly payment would be less. But if you keep paying what you used to pay on the initial loan, you will pay off your mortgage much faster.
If you can manage to keep paying your current repayments while getting a better deal with refinancing, this can result in serious savings by minimizing the number of years it takes to pay your mortgage. This takes a lot of self-control, but the amount of money you could save can be staggering.
Unlock equity
Simply explained equity refers to the difference between the value of your home and the amount you owe on your mortgage. Given the fact that property value increases with time, it is not simply a calculation of what you borrowed against how much you currently owe.
Home loan financing companies usually assess loans on a loan-to-value ratio. That means the value of your home minus what you owe on it. Generally, you would be able to borrow or refinance 80% of the LVR.
This means that you can unlock equity. Equity can be used for various financial reasons. You can purchase an investment property or choose to invest in another investment class such as shares. It is important to ensure that the asset you invest in offers a higher return than the interest rate on your home loan.
Equity can also be used to renovate your home. Build that barbeque and entertainment are you always wanted. Or maybe you need some extra room for new additions to the family. This could add even more value to your property.
By refinancing your home loan, you can also get your financial situation back on track. Refinancing might help you get your finances in order in the following instances.
Bad credit home loan
If your original home loan was a loan for people with a bad credit score, you are probably paying a very high-interest rate. By refinancing your home loan, you may qualify for a much lower rate.
To refinance from a bad credit home loan, you have to have paid any defaults. If you have been regularly making a repayment on time for the last six months and have built up enough equity in your home, it should be easy to obtain refinance at a much lower rate.
Debt consolidation
Refinancing for debt consolidation could be a savvy move. Interest rates on home loans are very low, while interest in other forms of debt is much higher.
Your credit cards and personal loans could charge interest rates between 15% to 25%. If you refinance your debt into your home loan the interest rate would be in the region of 4%.
You will pay one single payment every month towards your home loan instead of juggling various accounts and bills. This will increase your monthly cash flow and decrease stress levels related to debt payments.
When consolidating debt with your home loan take into account that the payment period is much longer than it would have been on personal loans and other debt. This could mean that you end up paying a bit more in the end because of the term.
If your home loan is in arrears
If you have fallen behind on your home loan repayments it is a serious situation that could see you lose your home.
The first thing you should do in a situation like this is to talk to your current lender. One option to explore is refinancing. Your current lender may be willing to refinance your home loan or extend the term.
If this is not an option or you are not happy with the options provided, you can apply for refinancing through specialist lenders. Although you will probably end up paying a higher interest rate, it is preferable to losing your home.
Specialist home loans are not meant to be a permanent solution. They can help you get back on track financially to stabilize your financial situation. Once you are financially sound again you can refinance through other lenders who offer lower rates of interest.
When interest rates drop and are low, time can be of the essence. Waiting too long to refinance your home loan could have you miss great offers. It is tempting to wait and see if interest rates will drop lower, but gambling when already on the bottom of the market can be risky.
When refinancing your home loan in Australia the goal is to get a better deal and save money. With a lot of competition in the market and interest rates at a low, the best time to look into refinancing may be right now.