At its most basic, you seek refinancing when your needs and changed, and your current loan no longer aligns with them.
You could switch your loan internally, meaning that you would seek refinancing while staying with the same lender. Alternatively, an external refinance is where you change lenders altogether. If you only put a portion of your loan up for refinancing, it is called 'split refinancing'.
All these look well and good on paper, however, why do you really need to seek refinancing? We will demonstrate a few circumstances where this could be advantageous to you. These are:
- To move to a lower interest rate. If you want to reduce your repayments, the essential step is to reduce the interest expense. With a lower interest expense and assuming you keep the same repayments as per your previous loan, you will be making a higher principle repayment thus allowing to repay your home loan quicker.
- To gain flexibility. On the flip side, refinancing could also help you move to a more flexible loan and release equity for investing purposes. Depending on your choice, you could pay off your loan sooner, a 100% offset account, and enjoy extra services such as free redraws or use the equity to create more wealth. Naturally, these benefits are priced into the product's interest rates.
- To minimize your risk. Interest rates periodically go up and down, and it's good if it's on a downward trend. However, the same cannot be said when the interest rates go up. Switching to fixed repayments could therefore minimize your risk due to unstable rates, since you will only pay a fixed amount regularly.
- To pay off your loan faster. On average, a loan term is about 25-30 years. It's so long that it might seem like a prison term of sorts. Thus, there are people who choose to pay off their loans sooner by making bigger repayments. If that is your goal, you could consider switching to principal and interest repayments as we mentioned earlier. This will enable you to significantly shorten your term, and move on to other things, such as your retirement or entering into property investment.
Whether you choose to refinance or not depends so much on the type of home loan that you choose. Here at Rate Detective, our qualified advisors are ready to provide you with all the information you need to make a sound decision. They will assess your personal circumstance, and even provide you with rate comparisons of Australia's top lenders.