Refinancing your home loan can be a smart way to take control of your debt and improve your financial situation.
A 2022 PEXA survey found that Australians refinanced their home loans on average an estimated 5.6 years into the term prompted by various benefits and market conditions. For instance, PEXA’s latest Mortgage Insights Report shows an increase in refinancing activities with total loans refinanced amounting to $220.4 billion, up 11.4% from the previous year. This spike has been largely due to rising interest rates, prompting homeowners to seek better terms.
Some of the benefits of refinancing include:
- Lowering your interest rate – which can reduce monthly payments and the total interest paid over the loan’s life.
- Adjusting your loan term – to better suit your financial goals, like extending or shortening the term.
- Consolidating other debt onto your mortgage – which can lower overall interest payments.
- Accessing new features – such as offset or redraw facilities or the ability to make extra repayments without penalty.
- Accessing your home’s equity – which can free up funds for renovations or investments.
- Capitalising on market trends such as locking in a competitive fixed-term rate
When to consider refinancing
- Interest rates have dropped – If the current rates are lower than when you secured your home loan, refinancing could reduce your monthly payments and save you thousands of dollars over the life of your loan. For instance, imagine you took out a $600,000 mortgage at an interest rate of 6.84% with a 30-year loan term, your monthly repayments would be approximately $3,928. Over the life of the loan, you would pay back a total of $1,413,918.
If you refinance to a new rate of 6.4%, your new monthly repayment would drop to about $3,753. This would save you around $176 each month. Over the life of the loan, you would pay back a total of $1,351,093 or $62,825 less.
- Your credit score has improved – A better credit score can unlock more favourable loan terms, translating into substantial savings. Before refinancing, check your credit report and score to see if it needs improving. You can do this by ensuring timely debt and bill repayments, reducing your credit card limits, and limiting new credit applications.
- Your financial situation has changed – Whether you’ve had a salary increase or are experiencing financial difficulties, refinancing can adjust your loan to better suit your current situation, either by reducing the term to pay off the loan faster or extending it to lower monthly payments.
- You want to change your loan term – You might want to change to a longer or shorter loan term. Refinancing to a longer term can reduce your regular repayment amount, but the total cost of the loan will be more due to accruing interest. Refinancing to a shorter term has the opposite effect of increasing your regular repayment amount, but saving you on the total interest payable.
- You want to assess your home equity – Refinancing can be a way to access the equity you’ve built in your home for improvements, a second home or other purchases. Generally, lenders will lend up to 80% of your property’s market value. So determine your useable equity, subtract your outstanding mortgage balance from this amount. For example, if your home’s current market value is $800,000, 80% of $800,000 is $640,000. If your outstanding balance is $440,000, your useable equity would be $200,000.
Seek expert advice
Navigating the refinancing process can be challenging, but you don’t have to do it alone. A skilled broker can also help you find a better deal and assist you with the refinancing process.