What You Need to Know About Refinancing
Once upon a time, when you signed a loan contract to buy your first home, you had to stick to the stated terms until the last payment was made. Nowadays, there are more flexible terms and better deals available because of the growing competition among lending companies. In fact, the chance to change home loans and improve your financial situation is just an online search away.
It’s all about improving your home loan deal, easing the financial pressure on homeowners to meet their monthly mortgage repayments and, as a result, accommodate a far more enjoyable lifestyle. Also known as mortgage or home loan refinancing, the attraction for borrowers lies in the savings that can be made – although the extent of those savings depends on a number of factors.
At The Loans Café, we have helped thousands of Australians to change home loan agreements for better ones, and in the process, to make genuine financial savings that have a truly positive effect on their lives. It’s something a lot of Australians are looking to do.
Housing finance figures published by theAustralian Bureau of Statistics (ABS) reveal that more homeowners are refinancing their home loans now than ever before. In June 2014 alone, a total of$1.5 billion worth of home loans were refinanced, a figure that represents a:
- 94.7% increase on the value from 12 months earlier
- 14.8% increase on owner-occupier refinances year-on-year
- 1.6% increase in refinance commitments over June and May 2014
And the trend is continuing right into 2015, withABS figures for February 2015 showing:
- 18.8% increase in the value of home loan refinancing
- 2.2% increase on the previous month (after adjustments)
- Over 19,000 home loans refinanced in February alone, worth $6.1 billion
So what exactly is home loan refinancing and how can a change to home loan terms make such a positive impact on your life? Well, let us fill you in.
What is Home Loan Refinancing?
The basic idea of refinancing any loan is to secure improved terms that make repayments lower and the burden of debt lighter. When it comes to home loans, improvement of terms can translate to significant sums of money.
The secret to successful refinancing is in finding the best possible deal from the hundreds of lending companies and financial institutions operating out there. The good news is that competition among these lenders is so high that improved interest rates and generally better terms are always available – it’s just a matter of finding them.
Refinancing works because it allows the borrower to take advantage of improved market forces, which can mean lower interest rates and increasing property values. For example, imagine you bought your home 5 years ago for $225,000 over 25 years. Today, market growth might mean your home is actually worth $250,000, and after 5 years, you may owe a balance of $200,000. That means positive equity worth $50,000 is now tied up in your home. Through home loan refinancing, you can free up that money to put to some practical use.
Alternatively, change home loan terms to lower the overall mortgage cost. Simply switch the lender and secure lower interest rates so that you’ll have a lower amount to pay each month. You may not access a large single lump sum, but the task of meeting your monthly mortgage obligation is made a lot easier.
The Benefits of Home Loan Refinancing
- Ease Your Financial Burden – most people re-examine their home loan, change it, and then find the month-to-month struggle a far smaller burden. Of course, exactly how much easing you experience depends on the terms of the new home loan deal, but if a mortgage repayment is reduced by just $100 per month, that means savings of $1,200 per year, or $30,000 over 25 years.
- Free Up Extra Cash – there is a long list of things you need cash for. It could be a family holiday or a new car, but it could also be the need to pay your child’s school fees, or to fund some much-needed home improvements. If your home can produce the cash needed, then refinancing is obviously a good move.
- Consolidate All Your Debts – In some cases, a homeowner decides to take advantage of the positive equity in their home to clear other debts. Basically, they access $50,000 through home loan refinancing and then use it to pay off their credit card balances, educational loans, car loans etc. The result is that just one debt needs to be paid each month, making debt management simpler while raising your credit rating in the process.
- Taking Advantage of Interest Rate Changes – Finally, the cost of any mortgage deal is measured in tens of thousands of dollars over the lifetime of the loan, even if the interest rate is respectable. But it also means that the cost can be significantly cut even if the interest rate is reduced only slightly. If the conditions are right, then a home loan change could maximise the value of the initial property investment.
Refinancing Is Not Always Best
It would be nice to think that for anyone with a home loan to pay, any change in terms is going to translate to huge savings. But the truth is that certain factors have to line up before such major benefits become a reality. Every borrower needs to look at their specific case and calculate how beneficial a change will actually be. Some of the key aspects to consider are:
- Your Balance – Lowering your monthly repayments often involves increasing the length of your home loan lifespan. The longer it is, the lower the monthly repayments will be because the principal is divided among a greater number of months. That means, home loan refinancing suits borrowers who still have a large balance to clear over a long period of time. If you are 3 years from paying off your 25-year home loan, then it’s not going to be worth your while.
- Exit Fees – Some lenders charge an exit fee for borrowers who decide to refinance with another lender. The size of the fee depends on the lender, but around $1,000 is pretty normal. To change home loans, the savings should be worthwhile so your calculations need to take these exit fees into account, too.
- Tax Issues – Property investors should look into how refinancing will affect their income. Tax deductions are only available on a property that earns the owner an income. That rules out a private home, but if you are renting, then certain expenses are tax deductible – these include initial borrowing costs and exit fees or penalties. But it’s important that you consult with your accountant or tax advisor to see how refinancing affects you specifically.
Home Loan Refinancing with The Loan Café
Based in Perth, WA, but operating Australia-wide, The Loans Café is one of the nation’s most trusted finance and home loan brokers. We are committed to helping families, individuals, and companies achieve the dream of home ownership, or in finding solutions for their financial projects or personal needs.
With access to an extensive array of home loan products from more than 30 recognised lending institutions, we have the ability to source the right home loan refinancing opportunities for you, whatever your situation might be.
For more on what you can find at The Loans Café, and how we can help you change home loan terms to best suit your needs, check out our website where you can fill out an online enquiry form, or call us directly at 1300-135-560 to speak to one of our friendly experts.