8 reasons to refinance your home loan
Refinancing might seem like a hassle, but it can be a beneficial move for your home loan
27 August 2022
3 minute read
By Amy Focic
When you first take out a home loan, chances are it won’t be the best loan for you for the entirety of your homeowning years. This is where refinancing comes in.
Refinancing your home loan every couple of years can make sure it’s always suited to your financial situation and needs.
Here are 8 reasons why you might refinance your home loan.
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1. Secure a lower interest rate
Your interest rate can have a significant impact on how much you pay on your mortgage.
Even a difference in interest rates of 0.5% can mean thousands of dollars saved.
Once you’ve had your home loan for a few years, it’s common to find you’re paying a loyalty tax.
This is when lenders charge existing customers higher interest rates than new customers.
It can pay to compare your rate to the rate new customers are getting and chat to your lender about lowering your rate.
However, if they won’t budge, it could be best to refinance to a more competitive rate with a different lender.
You might also want to switch a lower interest rate if your fixed interest rate period ends and you roll onto a high revert rate. A revert rate is the variable interest rate your loan will automatically switch to if you don’t do anything.
It’s important to remember that your home loan is more than the interest rate. A mortgage with another lender might have a lower rate, but they could charge more in fees. Ensure you review all aspects of the loan before you refinance.
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2. Add or remove home loan features
It’s likely that your personal circumstances will change over the course of your home loan, and you may need to alter your loan accordingly.
You might start off with an offset account that you pay for in annual fees, but find you don’t use it enough to reap the benefits.
Or, you might be coming to the end of your fixed term and you realise you’d like the flexibility to make unlimited extra repayments and pool them in a redraw facility.
Whatever your needs, you could refinance to alter your home loan’s features.
3. Pay less in fees
Are home loan fees becoming a pain in your hip pocket?
Refinancing to a low fee or fee free home loan could be the answer.
Be sure to check whether the home loan you want to switch to doesn’t make up for having low fees by charging a high interest rate.
4. Tap into your equity
If you want to access your home equity, refinancing is the way to do it.
Your equity is the portion of your home that you own outright. You can calculate your equity by subtracting your remaining home loan balance from your home’s current value.
You can use your equity to fund other purchases. For example, you might access your equity to:
Pay for home renovations
Put down a deposit on an investment property
Invest your money in shares, for example
Make another large purchase, like a car or an overseas holiday.
There are a few ways you can structure a home equity loan. A Loyalty Loans specialist can work with you to decide on how best to access your home equity.
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5. Change to a fixed rate, variable rate or split rate loan
Changing the type of interest rate attached to your home loan can be done by refinancing.
Sometimes, the type of interest rate you settle on when you first take out your home loan isn’t suited to you anymore.
Maybe you started out with a variable interest rate but now you’re craving the stability set repayments that comes with a fixed rate.
On the other hand, maybe you started with a fixed rate but would like to access the home loan features that are typically only available on variable rate home loans.
Or, perhaps you’d like to make the best of both worlds by refinancing to a split rate home loan. With a split loan, a portion of your interest rate is fixed while the other portion is variable.
6. Switch lenders
You might want to refinance if your lender’s service isn’t quite up to scratch.
For example, you might not be satisfied due to:
Poor customer service
Inflexible repayment methods
Inadequate mobile app or in-person services
Ethical reasons – for example, you may not agree with where your lender invests their money.
If you decide to refinance because of issues with your lender, ensure you take all the aspects of your new loan into account, not just the lender.
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7. Consolidate debt
Refinancing to consolidate debt can be a smart option for borrowers with other debts like personal loans, car loans and credit cards.
Debt consolidation involves combining other debts with your home loan. This way, you only make one monthly repayment instead of several.
Since home loan interest rates are typically lower than interest rates on other types of debt, you’ll usually pay a lower interest rate on consolidated debt.
8. Reduce or extend your home loan term
Sometimes, your circumstances mean that your home loan term isn’t right for you anymore. You can extend or reduce your home loan term by refinancing.
Your income might have increased since you first took out your home loan, so now you’re able to make higher monthly repayments.
Refinancing to shorten your loan term can make sure you don’t incur fees for paying off your loan early (for example, if you’re on a fixed rate home loan).
On the other hand, maybe you need to lower your monthly home loan repayments. Refinancing to a longer loan term can help with this, however you will pay more in total over the course of your loan.
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What do I need to be eligible to refinance my home loan?
If you’re thinking of refinancing your mortgage, you’ll need to make sure you’re eligible to do so.
To be eligible for refinancing, you’ll typically need:
At least 20% equity in your home – if you have less, you may need to pay Lenders Mortgage Insurance (LMI)
Proof of your income, assets, expenses and any other debts
Current home loan documentation
A good credit score and reliable home loan repayment history.
A Loyalty Loans specialist can do the leg work when you refinance, and can search, compare and apply for home loans for you. Just book an appointment at a time that suits you to get expert help.