Whenever it makes financial sense to do so. In the past, most people who took out a mortgage continued with it until they had paid it off. These days, people refinance their mortgage much more frequently. The average duration of a home loan in Australia now is just 4-5 years. Here we look at some of the reasons people in Australia refinance their home loan.
The most common reason for people to refinance their mortgage is to get a better deal. But be careful you don’t become interest rate-fixated. When you refinance your home loan, you need to consider fees and charges as well as the interest rate. You often have to pay charges for exiting your current home loan, plus charges for taking out the new mortgage. You need to be sure that in refinancing your home loan that you’ll be better off in the long run after taking into account all costs.
Many people only discover the full details about their mortgage when it’s too late. They try to do something and get told by their lender that either they can’t do it, or they will incur a hefty charge if they do. For example, you might want to take advantage of a redraw facility or link an offset account to your mortgage or make extra repayments without penalty. If your old home loan doesn’t give you access to the flexible features you want, it might pay to think bout refinancing over to a different loan type.
If you carry out renovations, it often makes sense to refinance your mortgage and take out a construction loan so you only pay interest as building progresses. Once construction is over, it might make sense to refinance your home loan again so that you consolidate the total amount you owe into a loan that minimises your interest bill, while giving you degree of liquidity.
Simplify debt management:
It’s common for many homeowners to take advantage of the lower interest rate on a mortgage to simplify their finances. If you’re paying high interest rates on credit cards, personal loans or car loans, you might consider consolidating your debts into your mortgage. Not only do you have the potential to reduce your monthly repayments and free up your cash flow, but you only have one repayment each month to worry about instead of several, which could streamline your finances.
Improve your cash flow:
If your budget is always a little tight at the end of each month, refinancing your home loan could help improve your cash flow. Switching to a loan with a lower interest rate, consolidating other high-interest debts, and changing your loan term all offer the potential to reduce your monthly payments. If you’re paying less on debt repayments each month, you’ll have more of your salary left over to pay for other things.
Over a period of time, most homeowners realise that they’ve reduced the amount they owe on their mortgage. At the same time, the value of their home has increased. The difference between the two amounts is the equity you’ve built up in your home. Refinancing your home loan lets you access that home equity to spend on other things.
If you’ve built up equity in your family home, you might be thinking about investing in a rental property or a share/investment portfolio to grow wealth for your future. Refinancing your existing home loan could unlock the equity you need to start investing in property or an investment portfolio.
Achieve personal goals:
Your home equity doesn’t necessarily have to be used only for investing. It’s possible to access some of the equity you’ve built to help you achieve personal goals too. You might want to take that dream holiday you’ve always wanted, or pay for the kids’ education or splurge on a new boat or caravan so you can enjoy your leisure time the way you want.
Lock in a lower rate:
If you’re concerned about the potential of rising interest rates in the near future, you might want to consider locking your mortgage into a fixed interest rate. A fixed rate home loan protects you against any future interest rate rises during the fixed term.
Any advice contained in this document is of a general nature only and does not take into account the objectives, financial situation or needs of any particular person. Therefore, before making any decision, you should consider the appropriateness of advice with regards to these matters