Why would anyone refinance a loan

Refinancing your home loan is when you either take out a new loan with a new lender, or negotiate a better loan with your existing financial institution.

It is important to keep reviewing your existing loan to assess whether or not it still meets your requirements. With the constant changes in the market, you can access different loan products at lower interest rates or with more favourable terms.

This is where refinancing comes into the picture. You can obtain a new loan from your existing lender, or apply for a new loan from a different lender. The idea is to ensure you are getting a great deal. But why should you consider refinancing when you have already obtained a loan? Here are 7 probable reasons:

Lower Interest

Pay less on the same principal

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Access Equity

Access and utilise your equity without selling your property.

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Debt Consolidation

Consolidate various loans into one low interest debt

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Variable vs. Fixed

Change method based on interest expectations.

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Change of Features

refinance to a loan which offers different features.

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Change of purpose

Switching, for example, from Investment to Owner Occupied.

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Bonus

Enjoy a once-off reward for refinancing

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Lower Interest Rate

This one is a no-brainer. If refinancing allows you to pay less interest, it makes perfect sense to go for it. Your monthly payments will be lower and you will have more disposable income, while at the same time being able to maintain your loan without it proving a burden.

Access Equity

Equity is the difference between the amount of your loan and the value of your home. For instance, if your home is worth half a million and your outstanding loan is $150,000, your home equity is $350,000, which most of it you can use for wealth creation by investing it. This can be a great option if you have an investment opportunity on hand that you want to avail.

Debt Consolidation

If you have a number of outstanding debts, such as credit card or student loan, you can consolidate them into one debt via refinancing. Generally, the interest rate charged on homes loans is lower as compared to other debts, so you can use this option to lower your repayments and also avoid the hassle of handling multiple debts. The only catch is that a short-term debt, such as credit card, can become a long-term debt if you refinance it.

Variable vs. Fixed

There are merits to both variable and fixed rate homes loans.

If, for example, you believe the market interest rate will go up over the next few years, you can benefit from a fixed home loan rate as you won’t have to pay more interest if the interest rate indeed goes up. On the other hand, if the interest rate declines, you won’t benefit from lower payments.

Refinancing allows you to switch between variable and fixed rates, and you might also have the option to split your loan between fixed and variable rates. You can better manage your loan even with the changes in interest rate through refinancing.

Change of Features

If you have had a home loan for some time, it is quite possible that would like to refinance to a loan which offers improved features.

Some of the features you can expect include redraw, which is the option for withdrawal if you have excess funds in your loan account, changing ‘Principal and Interest’ to ‘Interest Only’ and many more.

Change of Purpose

Over time, circumstances change and you may no longer need the loan for the purpose you initially obtained it for.

For instance, if you are moving from investment property to owner-occupied, refinancing might help you ease the burden of the loan.

Bonus

In some instances, lenders are willing to offer bonuses and other rewards on new loans.

For example, you might be entitled to a $2,000 bonus if you sign up with a particular lender. In this situation, it can be beneficial for you to refinance your loan via a different lender to enjoy the bonus as well as other benefits.

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