Why consider refinancing?

Refinancing can save you money on your repayments by lowering your interest rate

The interest rate on your mortgage is tied directly to how much you pay on your mortgage each month – lower rates usually mean lower repayments. When refinancing, you may be able to get a lower rate because of changes in the market conditions, your personal situation has improved over time, or because your credit score has improved. A lower interest rate also may allow you to build equity in your home quickly.

You can often get a better interest rate by switching lenders.

For example, compare the monthly repayments (for principle and interest) on a 30 year loan term of $400,000 at 4.20% and 5.20%.

Monthly repayment at 4.20% $1,956
Monthly repayment at 5.20% $2,196
the difference each month is $240
But over a year’s time, the difference adds up to $2,400
Over 10 years, you will have saved $24,000

Refinancing can adjust the length of your mortgage

Increase the term of your mortgage: You may want a mortgage with a longer term to reduce the amount you pay each month. However, this will also increase the length of time you will make mortgage repayments and the total amount that you end up paying towards interest.

Decrease the term of your mortgage: Shorter term mortgages – for example, a 15 year mortgage instead of a 30 year mortgages will allow to pay off your loan sooner, further reducing your total interest costs. The trade-off is that your monthly repayments usually are higher because you are paying more off the principle each month.

For example, compare the total interest costs for a loan of $200,000 at 6.00% for 30 years with a loan at 5.50% for 15 years.

Monthly payment Total interest
30 year loan at 6.00% $1,199 $231,640
15 year loan at 5.50% $1,634 $94,120

Tip: Refinancing is not the only way to decrease the term of your mortgage. By paying a little extra on principle each month, you will pay off the loan sooner and reduce the term of your loan. For example, adding $50 each month to your principle repayment on the 30 year loan above reduces the term by 3 years and saves you more than $27,000 in interest costs.

Changing from a variable rate mortgage to a fix rate mortgage

If you have a variable rate mortgage, your monthly repayments will changes as the interest rate changes. With this kind of mortgage, your repayments could increase or decrease.

You may find yourself uncomfortable with the prospect that your mortgage repayments could go up. In this case, you may want to consider switching to a fixed rate mortgage to give yourself some peace of mind by having a steady interest rate and monthly repayment. You also might prefer a fixed rate mortgage if you think interest rates will be increasing in the future.

Refinancing to get cash out from the equity built up in your home

Home equity is the dollar-value between the balance you owe on your mortgage and the value of your property. When you refinance for an amount greater than what you owe on your home, you can receive the difference in a cash payment (this is called a ‘cash out’ refinancing). In order to refinance to access your equity, you will need to have your home valued to determine its current value.

Property investment is currently one of the most popular ways of building wealth for your future. Whilst saving the deposit to purchase a second property may be difficult for many, rapid rises in property values in recent years have provided an opportunity to refinance in order to access some of the equity in your home to use a a deposit instead.

Accessing your equity will increase the amount you owe on your original property and increase your mortgage repayments. However, if you use the equity to make a property investment, you will have the opportunity to capitalise on home loan value increases on two properties over time and this has the potential to help you increase your wealth in the long run.

Other uses for a lump sum in cash are literally endless – you could use your equity to buy your family a boat, a caravan, the overseas holiday you’ve always wanted, to renovate or extend your home, to consolidate debts, or even use it to invest in a business or shares.

Remember though, for every $10,000 of equity you access, will generally mean an extra $55 in principle and interest repayments on your mortgage each month.

Refinancing to consolidate debts

It may be worth considering accessing some of the equity in your home to pay off your more expensive debts. This could dramatically reduce the amount of interest you have to pay on your overall debts each month, offering you some financial relief and helping you to enjoy a more comfortable lifestyle.

It’s a far better idea to be in a position to save money each month rather than waste it on expensive credit card and personal loan interest repayments. By refinancing to consolidate your debts, you could possibly find yourself in a position to save money to make other investments or even pay off your home loan sooner.

Refinancing to renovate or extend your home

Renovating or extending your current home to meet the needs of your growing family or changing lifestyle is often a better option than purchasing an entirely new home. By renovating or extending, you will be able to create the home that exactly meets your needs and if you’re careful about the improvements you make, perhaps even increase its value at the same time, which in effect offsets the cost.

In conclusion

If you have plans or goals for your future then remember, your home loan can be used as a financial tool to help you reach them. We’re here to help you make the most out of your home loan, so please don’t hesitate to give us a call for a chat about what you want to achieve and how refinancing your home loan could help to get you where you want to be. We’re always happy to spend the time with you to help you make the right decisions to reach your financial goals, so please call us today

About the author

Matt Carra

Matt Carra

Matt Carra is the Owner of Blue Key Finance, a Finance Broker since 2004, an SMSF Lending Specialist, a Property Investment Educator, and a Mentor to new Finance Brokers entering the finance industry. Matt is passionate about providing valuable guidance and honest advice, educating Australians on how to buy their first homes and invest successfully while protecting them with knowledge. Matt has strong long-term relationships with his panel of lenders and extensive knowledge on their credit policies, and utilises that skillset to give you peace of mind by recommending you to the right lender the first time, to negotiate a better deal, and to fight for your cause – that’s Matt’s commitment to you. Contact Matt today to start the conversation on 03 9700 7033 or email matt.carra@bluekeyfinance.com.au