When Does Refinancing Make Sense?

Thinking about refinancing? A better deal could mean serious savings and more breathing room in your budget.

If you’re wondering whether refinancing is the right option for you, here are some key factors to consider.

Why Refinance?

Refinancing your loan can bring a range of benefits, depending on your specific financial situation. Some common reasons people choose to refinance include:

Lower interest rates:

By refinancing when interest rates are lower than when you took out your original loan, you could potentially save thousands of dollars in interest over the life of your loan.

Better terms:

Maybe your credit score has improved since you first got your loan, or perhaps you now have a higher income. Either way, by refinancing to better terms, such as a lower interest rate or longer repayment period, you can reduce your monthly payments and potentially save money in the long run.

Consolidating debt:

If you have multiple loans with high interest rates, it may be beneficial to consolidate them into one loan with a lower interest rate. This can not only simplify your monthly payments but also save you money on interest.

Change in financial goals:

Your financial goals may have changed since you first took out your loan. Maybe you want to pay off your loan faster, or perhaps you need more flexibility in your payments. Refinancing can allow you to adjust your loan terms to better align with your current financial situation.

When Does Refinancing Make Sense?

Here are three situations where refinancing your home loan can be a smart move:

1. You Want Lower Monthly Repayments

Example:

Emma has a $500,000 loan at 6.5% interest (30-year term).

• Her monthly repayment is about $3,160.
• She refinances to a new loan at 5.5%.
• Her new repayment drops to $2,840, saving $320 each month.
• That’s $3,840 saved every year, enough for a family holiday or to pay down debt faster.

2. Your Fixed Rate Period Just Ended, and Your Loan Reverted to a High Variable Rate

Example:

 Mike’s 2-year fixed loan expired; his rate jumped from 4.2% to 6.7%.

• On a $400,000 loan, monthly repayments jumped from $2,175 to $2,587.
• After refinancing to a 5.5% rate, his repayments fell to $2,271.
• Mike saves $316 every month, giving his budget some much-needed relief.

3. You Want Extra Loan Features or Flexibility

Example:

 Priya’s current loan doesn’t offer an offset account or redraw facility.

• She finds a new lender who offers these features at a similar rate.
• Now, by keeping $10,000 in her offset account, Priya reduces her interest and saves money year after year.
• The added flexibility helps her prepare for unexpected expenses and manage her cash flow.

Key Factors to Consider Before Refinancing

Refinancing a home loan can offer substantial benefits, but it’s essential to carefully consider the potential factors and outcomes before making the switch. Here are some key points to keep in mind:

1. Extending Loan Terms

When refinancing, you may have the option to extend your loan term to reduce monthly repayments. While this can offer immediate relief to your budget, it’s important to note that a longer loan term typically means paying more interest over the life of the loan. Calculate the long-term cost carefully to determine if the overall savings are worth it.

2. Fees and Costs of Refinancing

Switching lenders often comes with associated costs such as discharge fees, application fees, and valuation charges. Ensure you fully understand these fees and weigh them against the potential savings to confirm that refinancing remains a financially advantageous choice.

3. Changes to Interest Type or Rate

Consider whether you want to switch to a fixed or variable interest rate, or even a split-rate option. Each type comes with its own benefits and risks, so assess your personal and financial goals to determine which structure suits your needs.

4. Loan Features and Flexibility

While securing a lower interest rate can be a primary motive for refinancing, also evaluate if the new loan offers features like an offset account, additional repayments, or a redraw facility. These options can provide greater flexibility and help you save over time, as seen in Priya’s example.

5. Impact on Credit Score

Applying for a new loan may result in a credit inquiry, which can temporarily affect your credit score. Speak with your lender or broker to ensure your application is structured in a way that minimises any adverse effects on your credit profile.

Ready to See What’s Possible?

Even a small rate drop could mean hundreds in your pocket each month. If you haven’t reviewed your loan in a few years, or you’re coming off a fixed rate, now’s the time to compare.

Our expert Mortgage Brokers specialise in helping Australians find better home loan deals.

Contact us today to find out about your options and see how much you could save.

We’re here to help.