The benefits of refinancing a home loan

If you’ve been paying off your home loan for some time now, you’ve likely thought about refinancing. After all, the chances that your current home loan is still the best option available for you may not be as high as you think.

Refinancing a home loan is a financial decision that may offer substantial benefits to homeowners. From nabbing a lower interest rate, to adding helpful features to your mortgage, switching your home loan can be a worthwhile investment. However, it’s not without its own risks and costs.

Let’s explore the potential advantages of refinancing your home loan, as well as what you should keep in mind before making this financial decision.

Benefits of refinancing a home loan

Lower interest rates and fees

Arguably the biggest advantage of refinancing your home loan is the ability to nab a lower interest rate. As interest charges are one of the most significant costs associated with your home loan, reducing your interest rate could save you thousands of dollars in interest payments. Even a 0.25% reduction in your interest rate could help you reduce your monthly repayments and boost your savings, or offer some much-needed breathing room in your household budget. 

Further, you may be able to switch to a home loan that charges fewer fees. Ongoing fees, such as annual fees, may seem small but can add up over a 20-30 year loan term. Further, you may be with a lender that charges fees for making extra repayments, limiting your ability to pay off your mortgage early. Opting for a lower-fee home loan may help you to save even more on your home loan repayments. 

Access to features

When you first applied for your home loan, you may have opted for a more basic, no-frills option to keep costs down. Now, you may be ready to add helpful features to your loan, such as offset accounts, a redraw facility or the ability to make extra repayments without penalty. 

Refinancing may allow you to switch to a mortgage with features that better suit your needs. You can look for loans that offer these perks that may not have been available when you first bought the property.

Access to equity

After a few years of repaying your mortgage, you may have built up some equity - particularly if property prices have risen in your area. Refinancing may allow you to access this equity by increasing your loan amount when you switch. This is a popular way for homeowners to achieve goals such as paying for renovations, making new investments, purchasing additional property or even taking the family on a holiday.

Just be sure that you have enough equity available to refinance to avoid paying Lenders Mortgage Insurance (LMI) again. Also keep in mind that by doing this, you’re increasing your principal owing and therefore increasing your mortgage repayments. 

Debt consolidation

Refinancing may also be an effective way to consolidate your existing debts, such as credit card balances or personal loans, into your mortgage. By rolling these debts into your home loan, you only need to worry about one ongoing payment, as opposed to juggling multiple debts with multiple interest rates and payment schedules. 

Keep in mind that you will generally pay more in interest charges over the full term of the loan, as you will be increasing your home loan amount to consolidate your debts.

Switching between fixed and variable interest rates 

Refinancing also allows homeowners to switch between fixed and variable interest rate types that may better suit their needs and budget. 

For example, say you initially locked in a low fixed interest rate and your fixed period is coming to an end. Instead of having your interest rate revert to the lender’s higher-than-average standard variable rate, you may consider switching home loans and nabbing a lower variable rate, or even refixing with a new lender. 

Reduced monthly payments

If you’re struggling financially, you may consider refinancing to extend your loan term. While this will result in paying much more interest over the life of the loan, it may also help to reduce your monthly mortgage payments. This can provide financial relief for instances of serious mortgage stress.

But, as already mentioned, by extending your loan term you will drag out your mortgage repayments and typically pay tens of thousands of dollars, if not more, in extra interest charges. This option may only be worth considering if you’re at risk of default and believe that selling would not be worthwhile.

The risks of refinancing a home loan

There are a range of benefits to refinancing your home loan. However, it's crucial that you carefully consider the risks and costs associated with refinancing, as well as how the decision aligns with your financial goals and circumstances.

Costs of refinancing

Refinancing is not free, and the process can cost you hundreds of dollars, depending on your current and new lender. There are a range of fees and costs associated with refinancing your home loan, such as discharge fees and application fees for the new loan. It's crucial that you familiarise yourself with all potential fees before switching and weigh these up against the cost of staying (or simply negotiating a lower rate).

It’s also important to note that refinancing doesn’t just cost you in money, but also in your time. It can take several weeks to process your refinance, and you’ll need to research your new lender, find and gather all your personal information and documentation, fill out the application and undergo credit and property assessments. 

Extended loan term

Some lenders may automatically extend your loan when you refinance, putting you back on a 25-30-year loan term even if you only have 15 years to go. Be careful to carefully check that your new lender does not re-extend your loan term as this will typically cost you tens of thousands, if not hundreds of thousands of dollars more interest.

If you only have, say, five years left of your current home loan, and if it is financially possible, it may be worth considering sticking with your current lender to avoid the risk of having your loan term extended. 

Creditworthiness

The process of refinancing involves completing a home loan application again, meaning another hard credit check on your credit file. After a few years of paying off your mortgage, your creditworthiness may have changed. If your credit score has declined, you may not qualify for a lower interest rate, you may face higher fees, or you may find your application rejected.

It’s worthwhile grabbing a free copy of your credit scores before you apply to ensure your financial health is what you think it is. 

Financial circumstances change

Keep in mind that if your income or employment status has changed since you first applied for your home loan, it may impact your ability to qualify for a new loan or your ability to repay it. Lenders look for stability in your finances, and typically favour applicants who have passed the probation in a role (being employed for 12 months is considered ideal) and have full-time employment. 

For example, one or more applicants may have switched from full-time work to part time employment, or may have experienced a loss of income. Further, if you or a spouse is on maternity leave, finding a lender that may approve your refinance is generally much more challenging.

If your financial circumstances have changed in a way that may mean a lower income, it may be worth holding off on applying to refinance until conditions improve or you pass a probation period at work.

It may be worthwhile consulting with an expert mortgage broker about whether refinancing is the right choice for you. 

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