What is refinancing?

Refinancing is the process of taking out a new mortgage to replace an existing loan. While this can be with the same lender, it often involves switching to another bank.

It might be the perfect time to consider switching your home loan if you’ve been thinking about moving home or renovating. Refinancing could also give you access to additional features like an offset account or a lower interest rate. 

Reasons you might refinance

If your circumstances change or your current home loan doesn’t have the features and benefits that are important to you, you might consider refinancing. Some of the common reasons people decide to refinance their home loan include:

  • It doesn’t offer the features or benefits that are important to you.
  • Your financial situation has changed.
  • You want to increase your home loan amount.
  • You’re moving house.
  • You want to use the equity in your home loan to renovate or buy an investment property.
  • You want to take advantage of a special offer from a lender.
  • You want to save money by getting a lower interest rate.
  • You are interested in consolidating debt, such as paying out a personal loan, car loan, or credit card debt.
  • You’ve had a poor experience with your current lender.

Benefits of refinancing your home loan

There are many good reasons to consider refinancing your mortgage, including:

  • To get a more competitive interest rate.

  • To take advantage of lower or no ongoing fees.

  • To get access to different features and add-ons such as redraw facilities or offset accounts

  • To use the equity in your home to borrow money to renovate, buy an investment property, buy a new car or take a well earned holiday.

  • To consolidate debts such as a personal loan, car loan or credit card into your mortgage so you can better manage your finances.

  • To shorten your loan time and reduce your repayments.

  • To change to a different loan type, for example, changing from a variable home loan rate to a fixed rate for more certainty over your repayments. Alternatively, you might choose to split your loan, where part of your loan is fixed while the other part is variable.  

Disadvantages of switching home loans

It’s important to look at the costs involved in refinancing and make sure that the costs don’t outweigh the benefits. Make sure you look at your home loan repayments, including any potential fees. Apart from the costs to close and open a new loan, there may be other ongoing fees, such as:

  • monthly accounting fees
  • fees on features like offset accounts or redraw facilities
  • late payment fees
  • switching fees
  • break costs if your fixed rate period has not yet expired.

Questions for your lender before refinancing your home loan

It’s always a good idea to contact your lender before refinancing and ask them to review your home loan, especially if your circumstances have changed or if your fixed interest rate period is about to end. If they can meet your needs with a better interest rate, you might decide not to refinance and avoid the application process and associated fees.

Some questions you might ask your lender include:

  • What type of home loan do you have and should you consider alternatives such as fixed rate, variable interest rate or a split loan?
  • What’s your current interest rate?
  • What is your loan term?
  • Are your mortgage repayments monthly, fortnightly, or weekly?
  • Are you paying principal and interest, or interest only repayments?
  • What features are available?
  • Are there features you’re not using that could help you pay off your mortgage faster or reduce repayments?
  • How much equity do you have in your property?
  • Are you looking for a loan increase for renovating or investing in property?

Alternatives to refinancing your home loan

It’s always best to first negotiate better terms with your current lender before considering refinancing.

Selling your current home and buying a new one doesn’t necessarily mean you need to refinance. In most cases, you can keep your existing loan by switching the property held against the mortgage. You may even be able to apply for a loan increase in some circumstances. With a fixed rate loan, you can keep your existing loan and avoid break costs and other fees that may apply when you switch mortgages.

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