A buy-and-forget mindset for your home loan could cost you money

A buy-and-forget mindset for your home loan is not ideal!  Leaving your home loan unreviewed could mean  that you forego significant potential savings, or lose out on opportunities to make your money work harder to build wealth for your future. In this article, I look at the Top Five reasons you might want to consider refinancing your home loan.


1. Pay lower mortgage repayments

Refinancing often reduces the amount of your mortgage repayments. This is probably the number one reason people refinance their home loan. Our home loan repayments usually account for around 30% of our income every month and everybody wants to lower this cost.

If interest rates have fallen since you took out your home loan you may be able to find a better rate that will reduce the amount of your mortgage repayments. Since you first took out your loan, even if rates have not fallen, you maybe able to access a better rate if your personal financial situation has improved during this time.

A slight drop in interest rates could potentially save you thousands of dollars over the life of your loan.

Refinancing could also help you to reduce your mortgage repayments if you extend the life of your home loan. For example: If you have been paying off your home loan for ten or fifteen years. you could potentially refinance the outstanding amount over a 30 year term, thereby substantially reducing your monthly repayment amount. Such a strategy might suit your particular goals and needs.

2. To extend or remodel your home

A growing family might need more space and a few more bedrooms might be the solution rather than buying a bigger house. Many people refinance their home loan to access their equity to improve their existing home, rather than enduring the stress of searching and moving to a new house

As we see on TV renovating, remodeling and extending is a great way to get the home you really want. What’s more, it can potentially increase the value of your home. So even though you may be taking out some of the equity you have in your home to do the extensions, the resulting increase in value of the home could potentially increase your equity again and help to recover some of the costs.

3. To consolidate debts

We often talk about the difference between types of debt. A home loan is a ‘good’ type of debt because it carries a relatively low interest rate and can be used to build wealth. Other types of debt can be ‘bad’ because very high interest rates can trap you into continually paying interest instead of paying off your debt. These debts are usually things like credit cards – which can often carry an interest rate of 20% pa or more, car loans, store credit and so on.

Refinancing could allow you to access funds to pay off these expensive debts once and for all. By rolling all your debts into your home loan, you will be paying them off at a lower interest rate. You could also save yourself money every month on interest payments, simplify your situation by only having one payment to make, and beat the interest trap of credit cards and other expensive forms of credit. But remember if you do this be disciplined so that you don’t fall into the credit trap again.

4. To access the equity for other purposes

Property equity is a valuable asset. A mortgage is a ‘good’ form of debt because it can be used to help create future wealth.  Because your equity increases as you pay down your mortgage and property values go up  this may provide access to funds you would not have had without a mortgage.

So your mortgage can be used to facilitate your lifestyle and build wealth for your future. By refinancing, you could access your equity and use the funds for a deposit on a property investment, to invest in stocks and shares, education costs, to support your children in purchasing their own home or for a wide variety of other reasons.   

5. Switching to fixed interest rates or a different mortgage product

Fixed interest rate loans, (or a different type of loan that offers additional benefits) is another reason for refinancing a mortgage.  As your needs and markets conditions change a switch to another mortgage product such as a fixed interest rate loan maybe more beneficial.

The number one benefit of a fixed interest rate mortgage is that your mortgage repayments will remain the same for the length of the fixed term – usually 1, 3 or 5 years. This gives you more peace of mind because your budget is much easier to project and plan.

While switching to a fixed interest rate mortgage may give protection from future interest rate rises remember that fixed interest rate mortgages are often a bit more expensive to start with so interest rates may need to rise considerably before you came out in front.

There are also many other mortgage products on the market that may have more beneficial features than the home loan you have now. For example, redraw facilities or a mortgage offset account. If your current home loan simply doesn’t offer you the flexibility you need, then by all means talk to us about some alternatives.

Take a free annual home-loan-health-check now. Call us and we’ll let you know where you stand with your current home loan versus other products available in the market.

A frequent home-loan-health-check is necessary to ensure that your current home loan is still the best home loan product available for you. We recommend that you have a chat with us at least once a year to see if the lending environment has changed or refinancing may be beneficial for you in some other way.

If you’d like to organise your home-loan-health-check, just give us a call. We’re here to help you assess your home loan’s performance and ensure that it is still the right mortgage product for your personal financial circumstances and goals now and into the future.

About Paul Brazier