When it comes to owning a home, refinancing your home loan is an important decision that should not be taken lightly.
Refinancing can lower your monthly payments and help you save money on things like insurance, taxes and other expenses related to homeownership. It can also improve your credit score or allow you access to additional equity in your home for repairs or renovations.
But before jumping into the process of refinancing your home loan, it’s important to understand the pros and cons of this big financial decision as well as how it fits into your overall financial plan.
What is refinance home loan?
A refinance home loan is a type of mortgage where you take out a new loan to replace your existing one. This can be used to pay off the remaining balance on your original loan, or to consolidate multiple loans into one single loan.
In Australia, this type of finance can help homeowners access the equity in their homes and make use of it for investments or home improvements.
Refinancing is an attractive option for many Australians as it generally offers lower interest rates than other types of financing, which can save you money over time. It’s also a useful tool if you want to switch lenders or need more capital to invest in something else – like starting up a business venture or buying another property.
How long does it take to refinance home loan?
The time it takes to refinance a home loan in Australia can vary significantly depending on various factors, including the lender, the complexity of your financial situation and whether you’re able to provide all necessary documentation.
In general, it is best to allow at least eight weeks from start to finish. Of course this length can be shortened if you apply with an experienced and efficient mortgage broker who specialises in faster turnarounds.
Such brokers often have access to exclusive deals with lenders that are not available elsewhere.
Why refinance? Pros and cons of refinancing your home loan
Benefits of refinancing your home loan
- Lower Monthly Payments: Refinancing your home loan can significantly reduce the amount you have to pay each month, freeing up more of your income for other expenses or investments. In Australia, the average homeowner saves thousands of dollarss by refinancing their existing home loan with a lower interest rate. This can add up over time and make a huge difference in overall savings.
- Cashback Offers: Cashback offers provide money back shortly after settlement. They can range from $2000 to $6000. You can use this money for anything such as paying off debt, making extra payments towards the mortgage or just having extra funds at hand so that you can put it towards something else such as home renovation or investment strategies etc.
- Improved Credit Score: Refinancing could potentially improve your credit score, especially when you apply for a new loan at a lower interest rate than your existing one. When you are approved for this new loan, it shows lenders that you are a responsible borrower who is taking steps to manage their debt better and improve their financial standing.
- Access to Additional Equity: When refinancing your home loan, you could access additional equity in your house which can be used for renovations or repairs, further helping to increase the overall value of your property. For example, if you need to do extensive repairs or updates that would cost more than what is currently in your savings account, refinancing with an increased equity line could help bridge the gap and provide necessary funds without having to dip into other sources of financing.
- Tax Benefits: You can take advantage of certain tax benefits when you refinance your home loan. When refinancing to access equity and using it to invest in property or other wealth-building activities, you can enjoy negative gearing and depreciation benefits.
- Debt Consolidation: Finally, refinancing can help with debt consolidation by combining multiple loans into one loan with a single payment schedule. It then becomes easier to track expenses and manage debts.
Downsides of refinancing your home loan
- Potentially High Costs: Refinancing your home loan can come with a variety of fees and costs, such as application fees, appraisal fees, title search fees, legal fees, and closing costs. All of these can quickly add up, making the refinancing process more expensive than expected.
- Extending Repayment Terms: When you refinance your home loan, the lender might offer a longer repayment term in order to reduce your monthly payment amount. This could result in higher total interest payments over the life of the loan as well as an increase in the length of time it takes to pay off the loan.
- Loss of Home Equity: Depending on how much you owe on your mortgage when you refinance, you could end up losing some home equity that you had built up before deciding to refinance your home loan – meaning any benefit from lower mortgage payments could be offset by a loss in equity value for your home.
- Risk of Financial Stress: If during the application process something unexpected happens such as an illness or job loss it could cause financial hardship as funds are being used on closing costs and other expenses associated with refinancing.
How much does it cost to refinance a home loan?
Refinancing your home loan will have you pay the costs of closing your current loan and opening your new loan. There are also two ways to go about it:
- Internal home loan refinance where you switch to a different loan under the same lender
- External home loan refinance where you switch to a different loan from a different lender
They have different costs associated with them. The costs will also vary depending on on your personal and financial circumstances. But you can expect to pay the following:
Upfront Fees
The upfront fee may include an application fee or lender establishment fee which is usually charged when submitting an application for refinance approval by most lenders. It can also include property valuation fee, settlement fee, and mortgage registration fee which varies depending on location.
Ongoing Fees
Some lenders will charge an annual fee for establishing a new loan account. They will also typically cover any service or transaction charges related to managing the loan such as making payments or amending details like address etc. It’s worth noting that some lenders have no ongoing fees at all so it pays to shop around.
Exit/Discharge Fees
Depending on how long it takes for you to pay off your new home loan once refinanced these could come into play too. If it’s less than three years then there may be an early payout penalty or a break cost. This depends on who you choose and their own specific guidelines. You may also be required to pay a discharge settlement fee to cover admin costs of exiting a loan.
When considering refinancing, it’s essential that you shop around for home loan refinance offers with competitive rates. You can start by assessing them in terms of initial fee structures and ongoing repayments.
When to refinance? Ask an expert
Weighing the pros and cons of refinancing, as well as how it fits into your overall financial plan, is critical to ensure that you are making the best decision for your unique situation. The mortgage experts at Q Financial are always available to provide guidance and answer any questions you may have about when or if refinancing your home loan makes sense for you.
Q Financial specialises in home loan for doctors, nurses, teachers, and non-for-profit workers. Contact us today to get started!
