Refinance a home loan basically means changing your existing home loan to a different one, in most cases, with a new lender. And before you think this is something complicated, refinancing becomes actually a less complex process once you have been previously approved and granted your first home loan.
If you consider refinancing or want to understand a bit more about how this process works, we have put together the pros and cons involved to help you make the right decision.
Your personal or financial situation may change throughout the years, you may have kids and need more space, maybe have a promotion and increase your salary or even face financial difficulties that will make you reduce your current costs, so it is reasonable to make adjustments.
One main reason why people choose to refinance their home loans is to get better rates and reduce their monthly repayments. The longer you have a loan, the more you’ll pay in interest, so by refinancing you might reduce the interest rate, which will significantly lower the total amount paid in the long term.
At Capta Financial we aim to do regular reviews on our clients home loans and we recommend this to be done at least every 2 or 3 years.
Besides saving money, there are also some other reasons why refinancing your home loan might be a good idea. Let’s dig deeper into it:
Refinance a home loan – Pros and cons
New features that will also help you save
Some banks offer different features when it comes to repayments that might also help you pay off your loan sooner and save on interest. Some examples of those features are the possibility of making extra payments, choosing your repayment frequency or having an offset account.
Checking if the new lender offers these kinds of features is a good tip for you to have in mind before deciding to switch banks. If you need help to find it out, reach out to us and we will be happy to assist you.
Your property has increased in value
Have you ever thought about how much your property’s value has increased throughout the past 2 or 5 years? According to property research firm CoreLogic, house prices in the whole of Australia have increased 16.1% from 2020 to 2021.
When the current value of your property is higher than how much you still owe, it means you have built up something called equity.
And what does equity has to do with refinancing?
The first thing is that banks are more willing to give bigger discounts to people who have larger amounts of equity.
Another interesting point is that you can access a proportion of your equity without having to sell the house, and this can be a valuable resource. You can request a top-up to access the equity of the property and use this money for whatever goals you have, like buying another property, making some renovations on your house, buying a personal asset, such as a car, paying off other debts or even to personal use like travelling.
However, it is important to be aware of the cons involved: when accessing your equity you will also increase the amount of money you owe, once this is still a loan and there is also interest rates involved.
Fixed-rate loan period has expired
On a fixed-rate loan, the interest rate and the repayments remain the same through the fixed period, which usually varies from one to five years. Once this period ends, the banks generally go back to the standard variable rate, which means interest and repayments will change according to the market at that time. And one of the ways to avoid this is to look for a refinance on your home loan.
Changing the purpose of the property from Owner-occupied to Investment
If you decide to buy a new house because your family is growing and you need more space, or simply because you have been relocated in your job, you might decide to rent your home to someone else and move to another place.
In this case, you will be turning the house from owner-occupied into an investment property and you will have to notify your lender to change your home loan type. Although investment rates are often higher than owner-occupied loan rates, this will be an opportunity to consider the best strategy for your needs.
It will be at this stage that you may consider interest-only repayments and maximizing any negative gearing benefits. We recommend that you also speak to your financial advisor and accountant when considering investment properties.
Are there fees involved in refinancing a home loan?
It is crucial to understand that there are some costs involved in a refinancing process, such as application, government and bank fees. For this reason, you should always talk to your mortgage broker to compare costs and find the best deal for your needs. Here at Capta we do that for you with no extra costs involved.
Although the extra fees, there are also several banks offering to refinance rebates to encourage people to switch banks. This means many lenders will give you money – normally from $2,000 to $4,000 – to refinance your home loan with them and cover the costs of that move.
Having that in mind, it is worth considering that you might spend some time and money to refinance your loan, but this will make you save even more in the long run.
How to refinance your home loan?
If you have been paying a home loan for 2 or 3 years now, talk to us! We can help you negotiate a better rate with your current lender or help you find a new lender that offers more attractive loan interest rates. With the right strategy, this can make you save a lot on interest or time on your loan.