Many people treat their home loan as a set-and-forget, riding out whatever the original loan terms and prevailing interest rates dish up. They may be doing themselves a disservice, as there are several ways in which borrowers can benefit from refinancing their mortgage.
1. Find a lower interest rate.
Whether interest rates are rising or falling, in a competitive mortgage market you may be able to refinance your mortgage at a lower interest rate. The benefits are that you can then…
2. Reduce your home loan repayments.
For a given loan term the lower the interest rate the lower your repayments. This then frees up some of your income for other purpose. Or you can…
3. Shorten the term of your loan.
If you maintain your current repayments with a lower interest rate loan, you’ll pay it off sooner and save heaps on interest.
4. Switch from a fixed to a variable rate mortgage (or vice versa).
A fixed rate home loan can help you lock in an interest rate for several years into the future. This can provide some protection against rising interest rates. Conversely, when interest rates are falling, a variable rate loan is the better way to go. Be aware, however, that even the experts often get it wrong when it comes to predicting the direction of future interest rates.
5. Consolidate debt or access equity.
If your home has increased in value then refinancing may allow you to access some of the greater equity you have in your home. This may allow you to pay off higher interest debt, such as credit cards, take a holiday, or pay for renovations.
While refinancing a home loan can be a winning strategy that’s not automatically the case. There will likely be costs involved in both paying off the existing loan and in establishing the new loan. If the difference in interest rates between the old and new loans is small, it may be hard to gain a benefit.
And take care when refinancing for debt consolidation or to free up equity. If you promptly max-out the credit card you’ve just paid off, you could be digging a deeper debt hole for yourself.
To find out if you’re getting the best deal from your mortgage, talk to our in-house finance broking team.