Talk to us about whether restructuring your loans could help you achieve a better outcome for your family.
Sometimes a loan feels like a comfy pullover – you’ve had it for so long, you don’t really think about it anymore. You just know it fits.
But, just like a jumper that’s seen better days, if you haven’t refinanced your loan over the past few years, you could find there’s another one that suits you better. This is especially true at the moment, given interest rates are at all-time lows and property prices have risen in most markets around the country. As a result, you could find the equity in your home has increased. This may allow you to consider options such as re-financing or borrowing funds to renovate or move.
In fact, across Australia, families are reconsidering how they live. More of us are working from home and making a sea change or tree change. Increasingly, refinancing is the pathway to a newly imagined future.
What is refinancing?
When you take out a loan it will be for a defined term. For instance, home loans are often for 20 or 30 years. Usually, you will re-finance the loan every three years. Personal loans are often shorter, they may have a term of only a year. No matter what type of loan you have, refinancing is an opportunity to make sure it still suits you.
For borrowers, refinancing helps to ensure your loan still fits your circumstances and the interest rate you’re paying is in line with the market rate. When you review the interest rate, don’t forget to check the headline rate, which is the advertised rate, as well as the comparison rate. This percentage reflects not just the interest rate, but also any fees and charges you pay on the loan.
You will also need to choose between a fixed or variable interest rate, or you can choose to fix the interest rate you pay on some of your loan and pay a variable rate on the remainder of the loan. It can be an idea to form a view on the direction of interest rates when you weigh up whether a fixed or variable interest rate is right for you. If you think rates are going down, you may choose a variable rate, so the rate you pay falls as the official cash rate drops. But you may choose to fix your interest rate if you think the official cash rate is set to rise, to lock in a lower interest rate.
Also check to see whether you still want the convenience of any features that are included in your loan. You might want an offset facility, which is an account that sits alongside your loan into which you can deposit extra funds, or even your salary. The funds in this account are offset against, and effectively reduce, your loan balance, so you only pay interest on the lower amount. This can save you thousands over the life of the loan. But remember the interest rate you pay on your loan will cover the cost of this facility.
Or it might suit you to have a redraw facility. This is also an account that sits alongside your main loan into which you can deposit funds, to help reduce the interest you pay. You can redraw these funds when you need money to pay your expenses. Again, the rate you pay on your loan reflects the cost of maintaining this facility.
When you refinance, it’s also a good time to consider other aspects of the loan, such as whether you can make extra payments to pay off the loan sooner. And make sure your lender has the underlying infrastructure you want. For instance, decide whether you want access to a branch network. It’s also a good idea to check out the lender’s web site, app and other digital tools and non-digital tools such as phone banking so you understand the level of service you’ll receive with your loan.
There are a number of different ways to refinance:
- Sometimes, your loan will just roll over to a fresh term, without the borrower needing to take any action.
- You can also directly re-negotiate your loan through your bank or mortgage broker.
When you go to refinance, you will need many of the documents you produced when you took out the loan – proof of income and assets and details of any of your other loan obligations. There is paperwork involved, but it’s well worth it if it means you and your family end up paying less each month in loan repayments.
When should I refinance?
There are many different opportunities for you to consider refinancing. Here are some popular ones.
- At the end of the term
The end of your loan’s term is a natural point at which to refinance. Sometimes your bank will roll over the loan. Or you may need to re-negotiate the loan’s terms at this point.
- When interest rates fall
This is a good time to talk to your bank about whether it can offer you a better rate for your loan.
- At moments that matter
There’s lots of times throughout life when it can make sense to refinance. You might want to renovate your home, pay for a big event life a wedding or use the money to pay for school fees.
Sometimes it can make sense to refinance to consolidate a number of debts into a single loan facility. For instance, you may have a credit card, a car loan and a personal loan and negotiate with you bank to roll them all into one loan, so you pay a lower overall interest rate.
Refinancing can reap many rewards. But it’s really important to make sure you’ll really be better off by switching to a new loan. Talk to us today about how to refinance and what your options may be.
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