Before getting your existing home loan, you probably spent time comparing different products and lenders as you looked to find a mortgage with a competitive rate that best met your needs.
But what was a good deal then might not be considered one today. The mortgage market is very competitive and loan products change regularly. So it’s a good idea to regularly review your home loan to make sure it’s still the right one for you.
Refinancing isn’t suitable for everyone with a mortgage. But for the right borrower, it can make a significant difference to your financial position.
Here are five common reasons people choose to refinance.
The most common reason to refinance is to switch to a home loan with a lower interest rate. This can lower your monthly repayments, keeping more money in your pocket. Reducing your interest rate also means you pay less over the life of your loan – which can add up to a considerable sum.
However, refinancing does come with costs attached such as application and valuation fees. Your current lender may also charge you for exiting your mortgage. So remember to factor these expenses into any calculations.
Get better features
Interest rates shouldn’t be your only consideration when you are reviewing your existing mortgage. Not all home loans offer the same features or flexibility, so some people refinance to switch to those that do.
For example, you might want a redraw facility or an offset account attached to your home loan. Redraw facilities allow you to make extra repayments, with the ability to withdraw these at a later date should your circumstances change. An offset account may help you pay less interest so you become mortgage-free sooner.
Pull out equity
If you’ve been paying off your mortgage for a while, it’s likely you’ve built up equity in your home. Equity is the difference between what you owe on the property and its current value. Refinancing may let you access some of this equity to spend on other things. For example, you may be able to use it as a deposit for an investment property.
Change your loan term
If you can afford higher monthly repayments on your home loan, refinancing to a shorter loan term could be a good idea. This means you pay off your mortgage faster, saving you money in the long run.
Change your loan type
Depending on the type of home loan you currently have, you may be paying off the principal and interest or just the interest only. Your rate might be fixed or variable. Refinancing gives you the option of switching between these loan types.
For example, you might be on a variable loan but want to protect yourself from potential rate rises in the future. Fixing to a low interest-rate home loan lets you do this. Alternatively, you may prefer the greater flexibility that variable loans offer and are willing to risk rates going up in the future.
So, should you refinance?
As with any financial decision, it’s always a good idea to seek professional advice before you decide to refinance. It can be a smart move under the right circumstances but it’s not appropriate for everyone.