There’s a little thing that I call ‘complacency tax‘ – it’s where you are paying more than you should be, purely because you have stuck with the status quo. It can be applied across all areas of personal finance – bank accounts, superannuation, personal insurances, car/home/contents insurance etc – but the biggest area I see it having a negative impact on peoples budgets is their home loan. Avoiding ‘complacency tax’ is one reason for considering refinancing, but let’s take a closer look at other reasons why refinancing your home loan is something you may consider.
In simple terms, refinancing is taking out a new loan to pay out an existing loan. When it comes to home loans, a refinance is usually done by obtaining approval with a new home loan lender, who will then payout the existing home loan lender and transfer the mortgage over your property to the new lender.
When done right, refinancing has the potential to save you a lot of money over time.
Let’s take a look at a few reasons why refinancing may be a smart financial decision for you.
The home loan market in Australia is a $31 billion industry (I got this data from here). This leads to intense competition between the lenders vying for their slice of the home loan pie. This competition often results in interest rates varying greatly between lenders, so the most obvious reason to refinance is to get a lower interest rate.
A common pitfall with home loans is that a borrower will often be attracted to a lender because of a “special rate“. This is usually a heavily discounted interest rate for a limited amount of time – usually around 2 years – and it is designed to attract new borrowers to the lender. The problem with these “special rates” is that they revert to a much higher rate following the end of the special offer term. Many people will forget about this (i.e. complacency) and will begin paying much higher interest than what may be possible using another loan product or by having the right conversation with the current lender. Because of this, you need to stay on top of your home loan and consider refinancing every 2 or 3 years.
Keep in mind that not every home loan is the same. I always suggest that you should partner with a lender who is going to help you achieve your long-term goals. Sometimes this means paying a little bit extra to access features that align with your strategy.
Over time, you’re going to build equity as you pay down your home loan and the value of your property increases. As this equity builds, it can be accessed (usually by refinancing) for a variety of reasons. These include:
Keep in mind… there is a difference between “equity” and “useable equity”. To learn more about this, check out this blog.
With current interest rates still at an all-time low, and with some lenders implementing “out of cycle” interest rate increases, you may be considering switching to a fixed rate loan to lock in a lower interest rate. For the more savvy homeowners, you may also be considering having a split loan – where a portion of the loan is variable and the rest fixed. To learn more about the different loan types, read this blog post.
Depending on your current lender, establishing a new structure for your home loan may only be possible through refinancing.
They say there are two certainties in life – death & taxes – but I argue that there is a third… change. Take a minute to think back a few years and consider how much life has changed. For example, if I was to think back 3 years, the following has happened:
I think you get the point.
When life changes, sometimes your home loan needs to change as well. You may need to access equity for one of the purposes mentioned early, or you may be looking to access features that will help you pay down your home loan faster. Either way, refinancing may be a strategy that you consider to help you evolve your finances as your life changes.
I may be biased… but the best way to refinance is to speak with a broker. A mortgage broker will help you compare home loans from multiple lenders to find one that helps you achieve your financial goals.
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