If you have a home loan, refinancing can also be used alongside budgeting to help you reach your financial goals. Here’s how refinancing works and how you can use it to reach your financial goals.
What is refinancing?
Refinancing is the process of taking out a new home loan to replace your existing home loan - this could be with your current lender, or with a completely different lender. There are a number of potential benefits when refinancing your home loan including:
- Securing a lower interest rate
- Reducing bank fees
- Consolidating debt
- Tapping into equity
- Accessing new features
- Reducing your loan term
Learn more about the benefits of refinancing your home loan here.
How can refinancing help you to achieve your financial goals?
Whether you’re keen to grow your property portfolio, start a business or just take a well-deserved break, setting these as financial goals can help to provide motivation to achieve them. While everyone’s financial goals are different, here’s how refinancing may help you to achieve the following goals.
Buy an investment property
Refinancing your home loan can give you access to the equity you’ve built up over time. Equity is essentially the portion of your home that you own outright. It’s the difference between the amount owing on your mortgage and the market value of the property.
In some cases, you might be able to refinance your home loan to access the equity. This equity can then be used to fund the deposit for an investment property helping you to expand your property portfolio.
Renovate your property
Renovating your home doesn’t come without cost, but on the plus side, it can also help to increase the value of your property depending on what you do. Refinancing your home can allow you to access equity to make those upgrades to your home. Plus, you might even be able to increase the value of your property with your renovations and bump up the equity yet again.
Go on holiday
Have you been dreaming of a Euro getaway? Or maybe you’re keen to take six months off to backpack around South America? For many people, going on their dream holiday is a financial goal that’s worth working towards. And it turns out that your home loan could help you to achieve that goal faster than you might be able to save for it.
While some people choose to put their equity towards another property, others prefer to use their hard-earned cash to treat themselves to a holiday.
Pay off your mortgage quicker
Did you know that refinancing could help you to own your home outright sooner than you thought? If the idea of being locked into a mortgage for 30 years doesn’t really do it for you, then it could be worth switching to a new home loan. Plus, you could even save yourself money in the process too.
In some cases, you might be able to refinance your existing mortgage to a home loan with a shorter term without affecting your repayments too much. That way, you can chip away at your loan a lot quicker AND save yourself years' worth of interest repayments.
Start a business
Do you aspire to ditch your 9 to 5 to be your own boss? Or maybe you’ve got a side hustle that you’re keen to make your full-time gig. If you’re in need of a bit of cash to get your new venture up and running, refinancing your home could be the answer.
So long as you’ve got sufficient equity in your home loan, you might be able to refinance the loan and put the money towards getting your business established. Whether that involves buying a commercial property or just freeing up a bit of cash to put towards those establishing costs, refinancing can help you get your new business off the ground.
What factors should I consider before refinancing?
While refinancing might seem like the perfect solution to help you achieve your financial goals, it’s important to make sure that it’s actually going to work for you and not against you. Depending on your individual circumstances there might be costs associated with refinancing your home loan.
Exit or break fees
Depending on your existing loan you might have to pay to discharge your home loan. Similarly, if you have a fixed-rate loan, you might have to pay a break fee if you’re going to be refinancing before the end of the fixed-rate period. It’s worth familiarising yourself with these potential fees to ensure it makes financial sense to refinance your home loan.
Depending on the new lender, you might be up for some fees to set up your new home loan, including application fees, valuation fees and potential legal fees. Again, it pays to do your homework and account for types of borrowing costs in your calculations before you decide to switch.
Lender’s mortgage insurance (LMI)
If your loan-to-value ratio (LVR) is less than 80% your new lender might require you to take out LMI again, even if you already took it out for your initial home loan. Unfortunately, LMI doesn’t transfer across different lenders, so this is another potential cost to consider before you refinance.
Refinancing your home loan can be a great way to achieve your financial goals, but it’s important to make sure you do your homework and weigh up your options before you make the switch. Our mortgage calculators can help you to easily work out your potential savings or repayments with a new loan.
The article does not have regard for the financial situation or needs of any reader and must not be relied upon as financial product advice. As this information has been prepared without considering your objectives, financial situation or needs, you should, before acting on this, consider the appropriateness to your circumstances.