A home loan is a major expense in many Australian households and the wrong loan can have a significant impact on your finances. It can also be detrimental to your wellbeing if your financial situation is causing you stress. That’s why it’s important to regularly monitor your finances and make sure you’re happy with your current home loan.
Fortunately, with increasing choice in the home loan market, there’s no reason to keep your current loan if the rates are too high, or if it doesn’t suit your circumstances.
Home loan refinancing is a great way to access a lower interest rate, more product features and better customer service. However, before making any changes, you should consider whether refinancing is the right move for your personal situation.
Here are a few reasons why it may pay off to think about refinancing your home loan.
Your interest rate is no longer competitive
Competition in the home loan market means great things for home owners like you. So, if you’re still sticking with a home loan that has a higher interest rate, now’s the time to consider refinancing. If you’ve been thinking about fixing your interest rate, don’t forget to check your options outside your current bank as well.
Your financial situation changes
Life can throw curveballs at us, whether it be a job change, redundancy, or unexpected bills. When unexpected changes happen in your life, it’s important to review all income and spending to ensure you’re going to meet your commitments and save yourself from stress. Your home loan is a major item within your budget, and it could save you thousands if you switch to a loan with a lower interest rate. It could be the answer to maintaining your current lifestyle while working through the unexpected bumps in the road.
If your household has been feeling financial stress and pressure from other debts, you may want to consider refinancing your home loan to consolidate these debts into one monthly repayment. This could be the way to finally get ahead on your personal loan, student loan, or credit card debts.
Although debt consolidation can help to ease financial pressures, you should still consider making payments at or near to your previous level to ensure the debt is paid off sooner and doesn’t extend to the same term as your home loan. Do this and take advantage of a reduced interest rate to pay more off the principle each month.
The key to making this work is discipline. After the initial relief of consolidating your debt, make sure you don’t continue to spend outside your means and find yourself in a similar position down the track with climbing debt levels while still paying down your consolidation loan.
If you’re looking to access your equity for home renovations or to buy an investment property, it’s a perfect time to review your home loan. You can start fresh and find a home loan that meets your needs right now. It’s common for priorities to change over the life of a loan, don’t feel you need to be locked into a home loan that no longer suits your purposes.
When you set up your new loan, it’s a good idea to match your loan term with the remaining term from your previous loan so you’re not extending the time required to repay the existing debt.
Refinancing isn’t always the answer
Believe it or not, sometimes refinancing isn’t the best course of action. Here are a few reasons why you might consider keeping your existing loan.
Good relationship with your existing lender – If you’ve enjoyed a good relationship and great service with your current lender, chasing a slightly lower interest rate may not be in your favour. Especially if you have a complex lending portfolio.
Lower rates could mean reduced service – Some lenders can maintain low interest rates because they offer a reduced level of service. These types of loans are good for simple lending where you’re unlikely to need further assistance over the short to medium term, but may not be suitable for those who are actively borrowing for personal or investment purposes.
Your loan has only a few years left – Refinancing to a new home loan product and extending your loan term isn’t recommended if you’re nearing the end of your existing home loan term. If you’re considering refinancing, look to match your existing term so you’re not disadvantaged and making repayments for longer.
Fixed rate penalties – When you’ve locked in a fixed rate, you’ve agreed with your bank to pay a certain interest rate over the fixed rate period. If you want to break this contract, they will calculate the cost to them to allow you to do so. These costs can run into thousands if you’re trying to break a high fixed rate when current rates are low and can negate the benefit of refinancing.
Your home loan balance is low – If you’ve paid off the bulk of your home loan and you have no plans to draw on your available equity, the time and paperwork required to refinance may not be worth making the switch.
To find out whether refinancing could be beneficial for you, please call Yotta, our Director, Lending Products, on +61 2 9278 9700 or send us an email.