What is it?

Refinancing you home loan is, in simple terms, the process of paying out your current home loan by taking out a new loan, either with your existing lender or through a different lender.

You will often see or hear someone say something like When Was Your Last Home Loan Health Check?  Home loans are no different to insurances or mobile phone contracts.  Prices and features change all the time.  This is why it is important to review your home loan regularly.  You may well have taken out a competitive loan in the last few years but the markets move and the competition changes over time, which means you might be able to do better, a lot better.

There is usually one main reason why you should refinance and that’s to save money on your repayments and overall costs.  Other less frequent but important factors can be unhappiness with the current lender, not having the right loan features or perhaps Debt Consolidation.  These days people switch from one lender to another when they can get a better deal.

Lenders are very competitive and there are hundreds of loan offers to choose from so it’s worth checking out the market regularly to make sure you’re not paying more for your mortgage than you need.  This simple action could save you hundreds of dollars each year.  On average, the current version of the loan you took out a year or two ago is cheaper – this is simply a result of the current competitive lending market.

Is there a cost to refinance my home loan?

The cost of refinancing a home loan is usually a less than you think.  The main cost on most occasions relate to state government charges and bank fees.  But the savings in interest rates will usually pay for itself many times over.  For instance, in NSW the average refinance costs might be around $600-700.  A 0.2% interest rate savings on a $350,000 loan will pay for this in less than a year.  If it was to take several years to recover her costs, refinancing may not be worthwhile.

Why do people do it?

Apart from the changing loan or banks to save money there are a few other reasons people do this:

  • Refinancing to purchase an Investment Property? This is a legitimate way to access equity in your home to get into the investment market.  By refinancing you can release some of this equity and use the money as a deposit on a buy to let property.
  • To pay for home improvements? Just as you can release equity in your property to buy an investment property you can use it to finance improvements to your current home.  In the current environment or rising house prices the house you bought only a year or two ago might be worth tens of thousands of dollars more.
  • To pay off other personal debts? Refinancing to pay off debts is worthwhile if you feel overwhelmed by your other debts and are confident that you can afford the refinance payments.  In most instances, you will find that the overall repayment reduces significantly as home loans usually have a lower interest rate than personal loans and credit cards, and because you are now repaying it back over 30 years.

Whether you want to call it a health check, review or annual service, it is always worth looking to see what the market is offering.  It doesn’t cost anything other than a little investment of your own time.  Even if you don’t do anything with the new information at the very least you will have an understanding of where you stand.

If you would like to look into this further please get in touch.