Why move your loan?
Finding a way to save money is just one of the many reasons you might be thinking about refinancing – perhaps you want to tap into the equity in your home or consolidate some debt. Here’s the rundown on why you might want to find another home loan.
You’re looking for a lower interest rate
Its simple mathematics - the lower the interest rate, the lower your repayments will be. Or you could keep your repayments the same and knock years off your loan - not to mention saving thousands of dollars in interest.
Keep in mind though there are costs involved with refinancing, so it’s important to balance these up against any savings you could make.
You want to access the equity in your home
Perhaps you’d like to renovate, take an overseas trip or any number of personal goals you’d like to turn into reality by tapping into the equity in your home.
Equity is the difference between what your property’s current market value is and what you still owe on your home loan. Let’s say you have a home valued at $800,000 and have a mortgage balance of $440,000. If your new home loan lets you borrow up to 80% of your home’s value that means your useable equity will be $200,000.
You want to consolidate debt
Refinancing could be a great opportunity to roll any debts you have such as credit cards and personal loans into a home loan with a lower interest rate. Not only could you save on interest, you’ll also take the hassle out of having to manage several repayments.
However it’s important to realise that consolidating debt could give short-term debt a much longer lifespan, which would mean you’d end up paying more in interest over the long-term. If you want to take advantage of the savings you’ll need to make additional repayments to pay off the amount you consolidated as soon as possible.
You’re after a loan with extra features
There’s more to a home loan than just the interest rate. In fact, today’s loans come with a whole range of features that not only offer convenience but can help you save money as well.
Depending on the loan you choose you may be able to take advantage of:
- An offset facility – this is a bank account linked to your loan where every dollar you have in the account ‘offsets’ an equal amount on your home loan. That means if you have $5,000 in your offset account, you won’t have to pay interest on $5,000 of the balance of your home loan.
- Flexible repayments – some loans allow you to make extra repayments at no additional fee.
- Redraw facility – if you’ve made any extra repayments a redraw facility means you can withdraw them should you need to.
- Repayment holiday – this feature enables you to take a break for a set period of time if you’ve made extra repayments on your loan or if you have a major life event such as having a baby.
- Flexible interest options – you could opt to go with either a variable, fixed or split rate loan.
- Portability – should you want the option of being able to refinance in the future, a portable home loan would give you the flexibility of being able to move your home loan to another without the expense of setting up a new loan.
Weighing up the downside
As with all financial decisions, it’s important to weigh up any potential downside. Some things to look out for include:
- Exit fees – you could end up with a double hit by having to pay to leave your old loan while also needing to fork out to set up your new loan.
- Extending the loan term – if you opt for a longer loan term your payments may be smaller in the short term but you’ll likely end up paying more interest in the long term.
- Losing existing home loan features – just as a new loan could offer a greater range of features, keep in mind you may lose out on some that were offered on your old loan.
- Turning short term debt into long term debt – while switching from a high interest rate to a lower rate makes a lot of sense on the surface, unless you commit to paying off the amount of high interest debt you’ve rolled into your loan, you could end up paying a lot more in interest in the long term.
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