Pros & cons of refinancing
Pros & cons of refinancing
Refinancing a home loan is not a decision to be made lightly. A successful home loan refinance usually involves a lot of planning, engaging with lenders, and calculating costs. If done right, you could potentially save thousands and own your home sooner, but it’s not without its risks. Before you refinancing a mortgage, it’s important to understand the pros and cons.
Benefits of refinancing a home loan
There are more advantages to home loan refinance than potential savings. Here are a few ways refinancing could give you a boost:
Lower interest rate
Interest rates change over time. If rates have dropped significantly since you’ve taken out a home loan, a refinance may be worth pursuing. Lowering your interest rate may reduce your monthly repayments, potentially saving you hundreds each month.
When comparing your current loan to a home loan refinance, it’s best to do some calculations. Get an idea of how much you could save with a lower rate by using our online home loan refinance calculator. Consider chatting with your existing lender first to see if they can offer you a lower rate on your mortgage, which could save you the hassle of refinancing with another lender.
Reduce the length of your loan
When you refinance your home loan, you may have the option to reduce the length of your loan. For example, you still have 20 years left on your loan term. You could reduce that by increasing your repayments.
Take note, paying your loan off quicker is likely to save you on interest over the life of the loan. It’s best to see if you’re in a position to increase repayments and reduce your loan term. Make sure you do the math to see how much you would save on interest to ensure this strategy works for you. Review your finances or consult with a professional.
Access your equity
Home equity refers to the difference between what you’ve paid off on your loan and the value of your home. If you have a $600,000 home and have $250,000 left on your loan, then you have $350,000 in equity.
When you refinance your home, your lender may allow you to access some or all of this equity, which you can use however you wish.
It’s commonplace for borrowers to access their equity and use it for things like renovations, holidays, a car, or investing. Keep in mind that your equity is a powerful tool in negotiating with your lender and can help you to gain access to a better interest rate.
Take advantage of new loan features
Refinancing means you can ask your lender to make features like redraw facilities and offset sub-accounts available to you. An offset sub-account acts similar to transaction account that is attached to your home loan. Money deposited in it is offset against the balance of your loan when interest is calculated.
For example, you have $50,000 in your offset sub-account and a $450,000 loan; interest will only be charged on $400,000 of the loan. A redraw facility allows you to make extra repayments on your loan and redraw these if needed, at the discretion of the lender.
An offset sub-account is a great way to reduce interest on the loan, while a redraw facility can be advantageous in an emergency or if you need to make a large purchase. Your lender may increase your interest rate to accommodate adding these facilities, so make sure the savings add up compared to the expense you may incur.
Switch to a new type of loan
If you’re currently on a variable rate loan, refinancing means you may be able to switch to a fixed rate, and vice versa. With the home loan market constantly changing, you may decide fixing your loan is the way to go to give you cash flow certainty.
Conversely, you may think interest rates may go lower, so you want to switch to a variable rate and have some flexibility. If you want the best of both worlds, you may decide to go with a split loan.
Disadvantages of refinancing a home loan
Here are a few drawbacks to refinancing you should consider.
Fees
It’s important to do your research when you refinance to see what costs you may incur. There may be fees from your current lender to cover the cost of finalising the loan, and your new lender may charge application and valuation fees.
If you’re breaking a fixed loan, you may have to pay break costs, which can be expensive. You should calculate the cost of fees before refinancing to ensure you’re saving more than you’re going to be charged.
Reduced home equity
If you access it to purchase another home, renovation, or as a cash-out loan, you’re reducing how much equity you have. Building equity takes time, and recouping the equity that you’ve built may not be easy.
Extend home loan term
For those refinancing to decrease their home loan repayments, it could mean prolonging their loan term. Extending your loan’s term could mean paying more interest over the life of the loan.
Ready to switch loans? Consider refinancing with us
Refinancing could be a great way to save thousands over the life of your loan while bringing down your monthly repayments. It’s important to do your research first to ensure the savings outweigh the costs. To learn more about your refinance options, check out our range of home loan refinance offers.
Find out in under 2 minutes if you qualify for one of our home loans.
About the article
As Australia's leading online lender, loans.com.au has been helping people into their dream homes and cars for more than 10 years. Our content is written and reviewed by experienced financial experts. The information we provide is general in nature and does not take into account your personal objectives or needs. If you'd like to chat to one of our lending specialists about a home or car loan, contact us on Live Chat or by calling 13 10 90.
