Understanding Loan Term Changes in Refinancing
When refinancing your home loan, one of the most significant decisions you'll face is whether to change your loan term. This choice can dramatically affect your monthly repayments, total interest paid, and overall financial situation. For Mornington homeowners, understanding these implications is crucial when considering refinancing options.
Changing your loan term during refinancing involves adjusting the length of time you have to repay your home loan. You might extend the term to reduce loan repayments or shorten it to pay off your mortgage sooner. Both options come with distinct advantages and considerations that should align with your current financial goals.
Why Consider Changing Your Loan Term
Several circumstances might prompt you to adjust your loan term when refinancing:
• Financial pressure: Extending your loan term can significantly reduce monthly repayments, providing relief during challenging financial periods
• Improved income: If your financial situation has strengthened, shortening the term can save thousands in interest payments
• Life stage changes: Career progression, family growth, or approaching retirement may influence your preferred repayment structure
• Interest rate environment: When accessing a lower interest rate, you might choose to maintain similar repayments but reduce the loan term
Impact of Extending Your Loan Term
When you extend your loan term during refinancing, you're essentially spreading your loan amount over a longer period. This approach can provide immediate financial relief by reducing your regular repayments.
For instance, if you have $400,000 remaining on your mortgage with 20 years left at a variable interest rate of 6.5%, your monthly repayments would be approximately $2,988. By extending this to 25 years at the same rate, your repayments would drop to around $2,702 - a monthly saving of $286.
However, extending your loan term means paying more interest over the life of the loan. Using the same example, the total interest paid increases from approximately $317,000 to $410,000 - an additional $93,000.
Benefits of Shortening Your Loan Term
Conversely, reducing your loan term when refinancing can lead to substantial long-term savings. While your monthly repayments will increase, you'll pay significantly less interest overall and own your home sooner.
Using our previous example, reducing the 20-year term to 15 years would increase monthly repayments to approximately $3,484, but total interest paid would drop to around $227,000 - saving $90,000 compared to the original 20-year term.
Access Loan Options from Banks and Lenders Across Australia
At Abundance Home Loans, we can help you access loan options from banks and lenders across Australia, ensuring you find the most suitable refinancing solution for your circumstances. Different lenders offer varying terms and conditions, and we can check eligibility for special lender policies that might benefit your specific situation.
The application process typically requires recent bank statements, income verification, and property valuation. Our team can guide you through this streamlined application process while exploring both fixed interest rate and variable interest rate options.
Additional Refinancing Considerations
When changing your loan term during refinancing, consider these additional opportunities:
• Consolidate debts: Use the refinancing process to combine high-interest debts into your home loan
• Release equity to buy the next property: Access your property's equity for investment opportunities
• Releasing equity in your property: Fund renovations, education, or other significant expenses
• Fixed rate period ending: If your current fixed rate is expiring, refinancing allows you to secure new rates while adjusting your term
Making the Right Decision
The decision to change your loan term should align with your financial goals and current circumstances. Consider conducting a home loan health check to evaluate whether your current loan structure serves your needs. Factors to weigh include:
• Your age and proximity to retirement
• Current and projected income stability
• Other financial commitments and goals
• Risk tolerance regarding refinance interest rates
• Desire to potentially access a lower interest rate
A mortgage broker can provide valuable insights by analysing your financial situation and presenting various scenarios. They can help you understand how different loan terms affect your repayments and total interest costs, enabling you to make an informed decision.
Refinancing with a loan term change isn't just about securing lower rates - it's about restructuring your mortgage to support your current lifestyle and future aspirations. Whether you're seeking to reduce loan repayments or accelerate your path to homeownership, the right refinancing strategy can significantly impact your financial wellbeing.
Call one of our team or book an appointment at a time that works for you to discuss how changing your loan term during refinancing could benefit your specific circumstances.
