What are the Benefits of Refinancing Your Mortgage?
As a mortgage owner, you may be wondering if it’s worth refinancing your home loan this year. There are multiple benefits that can come with refinancing your mortgage using a mortgage broker. But why are more people opting to refinance in 2021?
Have you noticed a recent increase in your monthly home loan repayments? If so, you’re certainly not alone. When Australia hit a COVID-induced recession in 2020, one of the options available to homeowners was a mortgage deferral package. Essentially, this allowed people with a home loan to put their repayments on pause for a while, or else switch to an interest-only or partial repayment. But now that the temporary mortgage deferral period has ended, everyone is back to making full repayments on their home loan.
Why else might you be noticing an increase in your monthly repayments? The three most common reasons are:
- Your initial interest-only period has now expired.
- The introductory rate you signed up for has come to an end.
- You’ve accessed your redraw facility, which has also bumped your payments up.
If you find yourself in any of these situations, then refinancing could be the ideal solution.
Let us demystify the process and explain the 8 benefits of refinancing your mortgage, including:
- Lowering your monthly payments.
- Reducing your overall mortgage balance.
- Accessing equity to achieve your financial goals.
- Consolidating your high-interest debts into a low-interest home loan.
- Saving your home if your mortgage is in arrears.
- Moving away from a high-interest, bad credit home loan.
- Benefiting from tax advantages.
- Paying off your home loan quicker.
1. Finding a lower interest rate to reduce your monthly repayments
If you have a 30-year $500,000 home loan with a 2.86% interest rate, then you would be paying about $2,070 a month in mortgage repayments. If you could refinance to a rate of 2.19%, you would reduce your monthly mortgage repayment to just $1,896. Initially, this may not seem like much of a difference. But this adds up to a saving of over $2,000 in the first 12 months alone!
Many lenders are currently offering competitively low interest rates, so it’s worth talking to a mortgage broker for more information on the best deals available.
2. A lower interest rate can reduce your overall mortgage balance
By refinancing to a lower interest rate, you will reduce the total interest you have to pay over the life of your loan, which will also help to reduce your overall mortgage balance. And if you can lower your interest rate but maintain the same level of repayments, you could significantly reduce your overall mortgage balance.
The main benefit of reducing your mortgage balance is that it will improve your loan-value-ratio (LVR). Your LVR is the difference between what your property is currently worth and how much you currently owe on your home loan. An improved LVR could allow you to access equity sooner and will maximise your return on investment if you decide to sell the property. And the lower your LVR, the more access you’ll have to great interest rates (as lenders view your loan application as having reduced risk).
3. Release equity to achieve your financial goals
As mentioned above, lowering your interest rate and improving your LVR can help you access equity. Equity is calculated by subtracting the value of your mortgage from the estimated value of your property. For example, if your property has a value of $500,000, but your mortgage balance is just $320,000, then you have $180,000 in equity. This allows you to:
Use the equity as a deposit for an investment property purchase.
Fund the cost of home renovations.
Buy vacant land for future construction.
Obtain cash out to fund a holiday, car or other purchase.
4. Consolidate your high-interest debts into a low-interest home loan
Home loan interest rates are at historically low levels. So, if you have high-interest debts, it may be worth consolidating them into your home loan as part of a refinance. Not only does this convert your existing high-interest debts to a lower interest rate (saving you money on interest), but consolidating your debts means you only have one monthly repayment for your home loan. Refinancing your mortgage with this option will allow you to do away with multiple payments, so you can more easily get in control of your finances.
Did you know you can consolidate many different types of high-interest debt facilities? These include:
- Credit cards
- Personal loans
- Car loans
- ATO debts
5. Save your home if your mortgage is in arrears by refinancing your mortgage
As a result of the COVID-19 pandemic, many people are hurting financially. If you’ve recently experienced major life upheavals such as job loss, illness, injury or the death of a loved one, you might be struggling to meet your mortgage repayments. Refinancing while interest rates are so low can save you from losing your home if your mortgage is in arrears.
You can work with a mortgage broker to find the best solution to suit your needs. A likely outcome of this scenario is that you’ll refinance with a specialist lender (sometimes referred to as a non-conforming lender) for one to two years. There are special considerations for this option, which will often come with a higher interest rate. However, the trade-off is a lender who will review your story and your credit history and then assess your mortgage application based on its merit. Choosing to refinance at the right time can save you from paying higher costs forever. Once your home loan has been “dry-cleaned” and your finances are back on track, you can then look at refinancing for a better interest rate.
6. Move away from a high-interest, bad credit home loan
Are you currently paying off your mortgage with a specialist or non-confirming lender? Did you know that you can often refinance in as little as 6-12 months back to a bank or lender with a much lower interest rate?
To find out if this is an option for you, start by talking to an experienced home loan mortgage broker. If you have a steady income and have been making your repayments on time (since making the switch to your current bad credit home loan), then you should be able to refinance to a standard interest rate with a different lender. However, you will need to meet other qualifying criteria, so speak to a broker about your specific situation.
7. Access potential tax benefits by refinancing your mortgage
Are you planning to refinance your home loan with the goal of using equity to invest in property, shares or other wealth-building opportunities? If so, you may be able to take advantage of negative gearing and depreciation benefits.
It’s important to speak with a tax professional to find out exactly what deductions you will be eligible for. But, as an example, if you were to spend $50,000 renovating an investment property, you could potentially be eligible to claim depreciation on that cost.
8. Finding a better home loan deal that suits you
Many Australian homeowners do not have the right home loan for their current circumstances! You might have ongoing bank fees attached to your loan. Or your home loan might have features you don’t need but are stuck paying for. Maybe your home loan is lacking in features. Or it could just be that your interest rate is higher than it needs to be.
By refinancing with the help of a refinance mortgage broker, you can find the right home loan product to suit your needs. And finding the right product to suit your current needs could help you pay off your home loan faster.
At North Brisbane Home Loans, we can help you navigate home loan products and features and provide tailored advice on:
- Fixed-rate home loans.
- Variable-rate home loans.
- Split mortgages.
- Professional packages.
- Basic home loan packages.
- 100% offset account.
- A line of credit.
- Flexible repayment options.
- Repayment holidays or reduced payments for your life situation.
- Loan portability, for when you move to another home but want to take your loan with you (rather than arranging a new loan).
By working with a mortgage broker, you can find benefits of refinancing your mortgage without stress. With the latest systems and technology to do all the hard work for you, a qualified refinancing mortgage broker can help find you a great loan rate and the mortgage package with the most suitable loan features for you. They can work out how much equity you can access and liaise with your current lender to manage the whole process.
There are many reasons to refinance your home loan in 2021, and our experienced mortgage broker in Brisbane, Queensland, can guide you through the entire process. Contact us today to see how we can help you refinancing your home loan and achieve your financial goals.