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29 Nov 2023
Pros & cons of refinancing
Refinancing your home loan may seem like a daunting prospect, but doing so could save you thousands on your home loan. Like anything, it doesn’t come without its risks, so check out our pros and cons list to see if it may work for you.
One of the biggest benefits of refinancing is to take advantage of a lower interest rate. Lowering your interest rate will reduce your monthly repayments, potentially saving you hundreds each month. You could use this money on essential or non-essential items, or continue to pay at the level of your previous repayments and pay off your loan quicker, saving you on interest.
Refinancing your home loan means you may have the option to reduce the length of the loan. Keep in mind this will probably increase your monthly repayments, but if you’re in a position to do so, paying your loan off quicker is likely to save you on interest over the life of the loan. For example, you may have a 25-year loan term and wish to reduce the length to 15 years.
Your monthly repayments will increase but you will likely save thousands on interest. Make sure you do the math to see how much you would save on interest to ensure this strategy works for you.
Home equity refers to the difference in 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 your equity is a powerful tool in negotiating with your lender, and can help you to gain access to a better interest rate. It’s recommended you don’t spend all of your equity in one go.
Find out more about how much equity you need to refinance.
Refinancing means you can ask your lender to make features like redraw facilities and offset accounts available to you. An offset account acts like a transaction account which is attached to your home loan. Money deposited in it is offset against the balance of your loan when interest is calculated.
For example, if you have $50,000 in your offset 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 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.
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 interest rates at rock bottom for several years, you may decide fixing your loan is the way to go to give you cash flow certainty.
Or, 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.
If you have less than 20% equity in your home you may have to put Lenders Mortgage Insurance (LMI). LMI protects the lender in the event you can no longer make repayments on your home. It can be incredibly expensive and must be paid up front.
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 ending 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 incredibly expensive. You should calculate the cost of fees before refinancing to ensure you’re saving more than you’re going to be charged.
Refinancing can 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 before to ensure the savings outweigh the costs.
If you’d like to take advantage of Australia’s first-ever variable loan to start with a 1, find out how much you may be able to borrow.
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