Make your money go further
At a glance
The decision to refinance is made when consumers realise their current loan is no longer suited to their financial situation. Wanting a better interest rate, consolidating all debts into one and equity access are just some of the reasons why people choose to do so. Before going ahead with the decision, make sure you’ve done your homework and sought professional advice to see if it’s the right choice for you.
Refinancing gives you an opportunity to take stock of your current financial situation and determine if there’s a better loan available.
The motivation to refinance is different for everyone. You may be looking to fund another investment, your financial circumstances may have changed, or if you’re lucky, you may have found a more appropriate rate. Whatever the reason, there are a lot of factors to consider before you make a change.
Once you’ve made the decision to refinance, it is imperative to thoroughly consider all the options available to you, to ensure that it is a worthwhile process to undergo. With the competitiveness of the market, there are constantly offers available that cater to all purposes of refinancing.
Make sure you know:
- Your current interest rate and repayments
- If you’re paying any monthly fees
- If your loan type, fixed or variable, works for you
- If your repayment type – principal and interest or interest only, meets your requirements
- If there are any other features that are important to you
- Whether your current lender will charge you for leaving them
Why Refinance?
Before you go ahead, you need to have a clear objective as to why you’re refinancing. By refinancing you may change the terms of your loan, for example by extending the loan term or borrowing additional funds. Either way, you need to weigh up the pros and cons.
Compare the Costs?
When comparing loans, you need to take into account all the fees and costs that may be applicable. These may include exit fees, break fees, valuation fees, settlement fees and any government fees and charges.
Make sure you use the comparison rate to get a better idea of the total cost of the loan.
Ultimately, you need to weigh up the costs and benefits.
Home Loan Features
Make sure you check the product features of any new home loans before you make the switch.
If you find something in your current loan useful, such as redraw, you want to ensure your new loan offers that too.
Some home loan features have the ability to save you a lot of money over the life of your loan, so it’s important to weigh these up and apply them to your own goals.
Choosing a home loan
When looking for a good deal on a home loan (mortgage), the interest rate matters. A home loan is a long-term debt, so even a small difference in interest adds up over time.
Home loans come with different options and features. These can offer flexibility or let you pay off your loan faster. Some options could cost you more, so make sure they’re worth it
Principal and interest loans
Most people get this type of home loan. You make regular repayments on the amount borrowed (the principal), plus you pay interest on that amount. You pay off the loan over an agreed period of time (loan term), for example, 25 or 30 years.
Interest-only loans
For an initial period (for example, five years), your repayments only cover interest on the amount borrowed. You aren’t paying off the principal you borrowed, so your debt isn’t reduced. Repayments may be lower during the interest-only period, but they will go up after that. Make sure you can afford them.
Your loan term is how long you have to pay off the loan. It impacts the size of your mortgage repayments and how much interest you’ll pay.
A shorter loan term (for example, 20 years) means higher repayments, but you’ll pay less in interest.
A longer loan term (for example, 30 years) means lower repayments, but you’ll pay more in interest.
An interest rate even 0.5% lower could save you thousands of dollars over time.
Weigh up the pros and cons of fixed and variable interest rates to decide which suits you.
Fixed interest rate
A fixed interest rate stays the same for a set period (for example, five years). The rate then converts to a variable interest rate, or you can negotiate another fixed rate.
Pros:
- Makes budgeting easier as you know what your repayments will be.
- Fewer loan features could cost you less.
Cons:
- You won’t get the benefit if interest rates go down.
- It may cost more to switch loans later, if you’re charged a break fee
Variable interest rate
A variable interest rate can go up or down as the lending market changes (for example when official cash rates change).
Pros:
- More loan features may offer you greater flexibility.
- It’s usually easier to switch loans later, if you find a better deal.
Cons:
- Makes budgeting harder as your repayments could go up or down.
- More loan features could cost you more.
Partially-fixed rate
If you’re not sure whether a fixed or variable interest rate is right for you, consider a bit of both. With a partially-fixed rate (split loan), a portion of your loan has a fixed rate and the rest has a variable rate. You can decide how to split the loan (for example, 50/50 or 20/80).
Home loans with more options or features can come at a higher cost. These could include an offset account, redraw or line of credit facilities. Most are ways of putting extra money into your loan to reduce the amount of interest you pay.
Weigh up if features are worth it
For example, suppose you are considering a $500,000 loan with an offset account. If you’re able to keep $20,000 of savings in the offset, you’ll pay interest on $480,000. But if your offset balance will always be low (for example under $10,000), it may not be worth paying for this feature.
Avoid paying more for ‘nice-to-have’ options
When comparing loans, consider your lifestyle and what options you really need. What features are ‘must-haves’? What are ‘nice-to-haves’? Is it worth paying extra for features you may never use? You may be better off choosing a basic loan with limited features.