If your family has outgrown your home or your circumstances have changed, you may want to consider refinancing your current home loan.
Regardless, it’s always a good idea to review your home loan from time to time to ensure it still suits your needs. Here are three reasons why you may choose to refinance and how it could help you.
1. Renovate your home
Perhaps your kitchen needs an upgrade or the kids would like a playroom – a renovation can make you feel like you’re in a brand new home. You may be able to finance a renovation by borrowing against the equity in your home, applying for an additional advance on your existing loan or changing to another lender that lets you borrow more.
When you’re working out how much you’ll need to refinance for the renovation, it’s important you don’t overcapitalise. For example, if your new kitchen costs $20,000 but only adds $10,000 to the value of your home, you’ll overcapitalise by $10,000. A local real estate agent can give you an idea of how much value the renovation will add to your home. You may also need to factor in the cost (and hassle) of moving out while work is being completed. Creating a budget before you begin the work will help you keep on top of the costs.
2. Consolidate multiple debts
If you're paying off a few debts with high interest rates, like a credit card or personal loan, it may make sense to consolidate them all into your home loan. This means the equity in your home is used to secure the additional debt, consolidating multiple loans into one. Consolidating debts can help save on interest payments and fees and has the added bonus of being one single loan rather than multiple loans you have to be across. Speak to a mortgage broker or financial adviser to determine if this strategy is appropriate for your person circumstances.
Before consolidating your debts, consider any fees or charges you might have to pay to refinance the loan, as well as any penalties charged for paying off the debts early.
3. Switch between variable and fixed home loan rates
With interest rates changing regularly, it’s a good idea to occasionally review whether you should have a fixed or variable rate loan. While a fixed rate loan can make budgeting easier, they are generally less flexible than variable rate loans and may not allow you to pay more off your loan. Keep in mind that your lender may charge “break fees” that can make the switch to a fixed rate loan more costly. If interest rates go down your loan won't change, which can be frustrating. However, if you have a variable rate loan you’ll have to bear any potential interest rate rises.
To get the best of both worlds you may consider splitting your loan when you refinance, paying part variable and part fixed interest rates.
When it comes to refinancing there are many options available to you. If you are thinking of refinancing, it’s a good idea to consult your mortgage broker, accountant or financial adviser before making any concrete plans.