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With today’s economic climate, and the constant changes in interest rates, refinancing home loans has become a heightened topic of discussion amongst Australian homeowners. Refinancing your home loan is the process taken to replace a current home loan with a new loan. The new loan is usually through a new lender, or you can renegotiate the existing loan terms with the current lender. The main of goal refinancing is to achieve better loan terms, like a lower interest rate or loan duration. Whilst refinancing your home loan can seem like a good idea in some instances, it’s important to consider the pros and cons, and when might be the right time to refinance.
Pros of Home Loan Refinancing:
Lower Interest Rates: Securing a lower interest rate is a primary reason for refinancing a home loan. If interest rates have dropped significantly since the initial loan was taken, refinancing can enable borrowers to take advantage of lower monthly repayments, thus saving a substantial amount of money over the loan duration.
Debt Consolidation: Debt consolidation involves combining multiple debts into a single loan. By refinancing a home loan, this provides an opportunity to think about the option of debt consolidation which allows you to merge high-interest debts, such as credit cards and personal loans, into one mortgage. This can help borrowers to simplify their financial obligations and potentially reduce their overall interest payments.
Access to Equity: When a property appreciates in value overtime and a homeowner makes mortgage payments, equity is built. The equity amount is the difference from the property value and the outstanding loan balance. For example, if a property is worth $900,000 and there’s an outstanding loan repayment balance of $350,000, there can be up to $550,000 in equity available. When refinancing a home loan, homeowners can tap into the equity of their property and can use the funds for purposes such as renovations, which could increase the value of their home.
Flexibility in Loan Terms: Refinancing a home loan offers the opportunity for borrowers to change the loan terms to better suit their needs and financial goals. This can involve changing the duration of a loan, or choosing a different rate such as a fixed or variable interest rate.
Cons of Home Loan Refinancing:
Fees and Charges: Refinancing often incurs the inevitable fees and charges. These could be upfront fees and charges, application fees, valuation fees, and legal fees. It’s important to consider if the overall financial benefits of refinancing outweigh the costs and expenses involved.
Extended Loan Tenure: The loan tenure is the duration of a loan and when it is to be repaid by the borrower. Although refinancing can lead to lower monthly repayments, it is important to consider the potential adverse results of extending the loan tenure, like paying more interest over the loan duration.
Reassessment of Financial Situation: Before a lender approves a loan, the lender assesses the financial situation of the borrower. This includes looking at the borrower’s income, debts, credit history, and employment stability. If there have been any changes in these circumstances since the original loan approval, it may impact the borrower’s eligibility for refinancing or alter the loan terms that may be offered.
Potential Loss of Benefits: When refinancing, it’s important to consider the potential loss of existing features and benefits on an existing loan. This could mean losing access to redraw facilities, loyalty rewards, pause options, and offset accounts.
It is highly recommended to assess the pros and cons before making the financial decision to refinance. According to AFG, “More than half of all Australians taking out a mortgage are doing so with the help of a mortgage broker”. So if this, or refinancing, is something you’d like to do, please contact Biz Loan Connexion who takes the time to listen to your needs, guide you in the right direction, and always act in your best interest. For more information, please check out the Australian Finance Group ‘Is your home loan still right for you? – Our guide on what to consider when it comes to refinancing’ flyer:
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