Smart home loan refinancing strategies

Refinancing is the process of replacing your existing home loan with a new one over the same asset. Homeowners decide to refinance their property for a variety of reasons. Whether it’s accessing a better home loan deal, releasing equity or consolidating debts - refinancing may be a smart way to improve your current financial situation.

Debt consolidation

One of the common reasons borrowers decide to refinance their home loan is to consolidate their debts. Depending on your financial circumstances, you could bring all your outstanding loans, such as your mortgage, car loan, credit card and personal loan, into one facility.

Ideally, this would result in a single repayment, with one interest rate and one set of fees, which can help you manage your finances better. Before taking any steps to consolidate multiple debts, do your research and get a good understanding of the pros and cons of debt consolidation.

Switching to a lower interest rate

Many people consider refinancing to access a home loan with a lower interest rate, as a lower interest rate means a reduced repayment. It is a good idea to review your current loan by comparing your current interest rates, fees and repayment amount with other lenders. Banks and non-bank lenders increase and reduce the rates they charge on their loan products for many reasons, so don’t feel tempted to refinance just to chase a slightly better interest rate.

It’s not advisable to choose a new lender solely for a lower interest rate without reading the fine print. There could be fees and charges involved in moving your loan to a new lender, so do your research before you make the switch or speak to your trusted Mortgage Broker to see if refinancing will put you in a better position financially.

Added features to your home loan

Everyone’s circumstances change – it’s not just the movement of interest rates that can trigger your interest in refinancing. If you’ve outgrown the home loan you originally organised, refinancing can help bring it up to date and open up a raft of useful features that can benefit your financial position. Choosing a home loan with an offset sub account or a line of credit, can allow you to use your savings to reduce interest payable on your home loan, without paying it straight into the mortgage itself.

Many borrowers choose to use their offset sub-account in place of their everyday transaction account. This is a common method of money management, as it allows your existing funds to reduce the interest that is payable on the home loan. If you’re intending to use the sub-account to pay your home loan off faster by reducing the interest, you should consider the account more like a savings account and avoid using the funds.

Releasing your home equity

If your property has increased in value, perhaps due to a competitive real estate market or improvements you’ve made, you can access this increase in equity by drawing from your existing home loan. These funds can be used as a deposit for an investment property, or your next home improvement project.

This is only an option if your home is worth significantly more than you paid for it. Home loan lenders will require a formal valuation before allowing you to access the equity, the results of which might be less than you expected, particularly if you’re looking to refinance with a traditional home loan lender.

There are certain risks associated with releasing the built-up equity in your home. If you release too much money now, you might find that you do not have enough equity later on when you need it. Consider your options carefully before making the move to use your home’s equity.

While there are benefits when it comes to refinancing, there are also fees associated with refinancing. Although these fees vary from lender to lender, in general some of the fees include a discharge fee and new application fee. Depending on your home loan, some lenders may also charge break fees.

If you'd like to know more about your refinancing options, contact your trusted Mortgage Broker to discuss your lending options.

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.