In our high interest rate environment, home loan refinancing is a powerful but often underutilised strategy. It provides homeowners and investors the opportunity to optimise their lending by reducing monthly repayments, accessing more funds, or reconfiguring their lending environment to enable faster portfolio growth.
We recently discussed refinancing in episode 4 of our podcast, Your Lending Era. In today’s article, let’s revisit key moments from the podcast to shine a spotlight on refinancing, and how it could provide value to your property ownership and wealth creation goals.
First things first. What is refinancing?
Simply put, refinancing involves moving a home or investment loan across to another lender (or sometimes just another loan product), usually with a different interest rate, features, and/or terms.
Refinancing can occur within the same lending institution, but usually involves changing lending institutions completely. This is where a broker’s strengths come to light–we use our ability to compare multiple lenders to get you the most suitable loan for your situation.
“We’ve got handfuls of lenders to choose from. So we simply put in a loan amount, a property value, and we’ve got 50, 60 options,” Jess says.
So, what are some reasons for refinancing a home or investment property mortgage? Let’s look at some.
Reason for refinancing: Securing lower interest rates
One primary motivator for refinancing is to secure lower interest rates. This desire to “jump ship” for a better deal stems from the fact that lenders often offer more attractive initial discounts to new customers, leaving existing borrowers to reconsider their options.
Often, when new clients sign their loan contract, they’re agreeing to accept a discounted rate. However, sometimes, banks will offer a bigger discount later in time, to attract more customers.
“The bank’s offering bigger and bigger initial discounts to attract more and more new clients,” he explains.
“And then when you circle back and say, hey, you are advertising this, the bank can, well… say you signed for the discount you currently have,” David says.
Reason for refinancing: Adjusting loan terms
Adjusting loan terms to suit changing life circumstances, such as nearing retirement or planning for maternity leave, is another reason for refinancing. This benefit offers financial flexibility, allowing borrowers to extend their loan terms to lower monthly payments or shorten them to pay off loans quicker.
“Another reason that we see people wanting to refinance is to shorten their loan term if they’ve got retirement or something coming, up or extending it,” Jess says.
David agrees. “I’ve got clients I do this for all the time, so they might come in and say, hey, I want to refinance. I want to drop my payments,” he says.
“And I say, well, what do you want to drop your payments for? They’ll look only for a little bit because we’ve got a child on the way or something like that.”
“And we’ll say, okay, well you’ve currently got 20 years to run, we’ll give you a longer loan term out to 30, but we’ll reset your payments today at exactly what they currently are,” he continues.
Reason for refinancing: Debt recycling
Debt recycling is another reason to refinance. This is where borrowers aim to convert non-deductible debt into tax-deductible debt by leveraging equity in their property for investment purposes. This method underscores the importance of refinancing not just for better loan conditions but also for smarter financial planning.
“A lot of my clients will be referred by an accountant or a financial planner, and what they’re doing is they want to take the original home loan, they want to refinance that and get a better deal,” David says.
“But they’ve got equity in that property or maybe they’ve paid down that loan sooner than they’ve made extra payments and they’ve got ahead.”
“And what we want to do is we want to split off part of their borrowings into a separate loan that they’re going to use for some other purpose.”
“And that might be buying shares, buying into a business, buying into a business partnership. It might be going and using that money as a deposit for another commercial property, whatever the case may be.”
“So in that instance, some people refer to that as debt recycling. So as we’re bringing down the home loan debt, we’re recreating debt against the home to go and use for some other purpose.”
“We’ve just recycled it from occupied debt into tax deductible investment debt,” he explains.
Reason for refinancing: Accessing equity for renovations
Accessing equity for renovations without exceeding 80% of the home’s value is another strategy that avoids the need for lender’s mortgage insurance and potential overcapitalization. This tactic has gained popularity, especially for funding home improvements that enhance property value.
For example, if your home is worth $1,000,000, and you have a loan value of $500,000, you’ve got $500,000 worth of equity available to you. However, usually, you won’t want to borrow again more than 80% of that equity—otherwise you’ll have to pay Lender’s Mortgage Insurance (LMI).
Reason for refinancing: Consolidating debts
Consolidating debts into a single, lower-interest home loan can significantly improve household cash flow and simplify financial management. This method is particularly appealing for managing multiple high-interest debts, offering a path to more manageable repayment terms.
David says, “where this usually comes about is life will happen, something will get in the way, there’ll be maternity leave or there’ll be a period of non-employment.”
“Someone loses their job, financial decisions are made, and some personal debts are accrued, car breaks down, need a new car, got a personal loan for that. In between jobs, ran up a credit card debt, and now we’re trying to get back on all of that.”
“Now, most of those unsecured debts might be at 14 to 22%, whereas your home loan might be less than six. So it would make sense in some instances to consolidate those other debts into the home loan to attract a cheaper interest rate, bring down the payments, give you one thing to work on and go from there,” he says.
Refinancing costs and considerations
The podcast also emphasises that while refinancing can offer numerous benefits, it also comes with its set of costs and considerations. Upfront and ongoing costs associated with refinancing underline the importance of careful planning and consultation with mortgage brokers or financial professionals.
Can we help you refinance your loan(s)?
Whether it’s securing lower interest rates, adjusting loan terms, debt recycling, accessing equity for renovations, or consolidating debts, the journey towards refinancing requires careful consideration and professional guidance.
If you’re looking for an expert team (and a broker with premium status) to help you refinance your lending environment, request a Free 30-Minute Finance Strategy Session during which you will…
- Get a better understanding of the lending options available to you
- Discover ways to save money on interest, fees, and charges that are specific to your unique situation
- Get an up-to-date picture of the lending landscape including rates, conditions, and how to structure loans
- Learn about our process to find you a loan that could save you thousands.
- This no-obligation free session will be held with one of our experienced mortgage brokers.
Please be assured this will not be a thinly disguised sales presentation. On the contrary, you’ll receive our best strategic advice, specific to your situation, so you too can accumulate multiple properties without sacrificing your current lifestyle and accelerate your progress towards wealth.
Schedule Your FREE 30-Minute Finance Strategy Session Today
Learn more by watching our podcast
You can learn more about refinancing by taking a look at our Refinancing podcast here, or you can browse all episodes here.
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Please note, the numbers and assumptions listed in this article are for educational purposes only. Individuals should seek specific advice pertaining to their unique situation and the real estate market before making any decisions.
Trilogy Funding Two is a corporate credit representative (Representative Number 506131) of BLSSA Pty Ltd, ACN 117 651 760 (Australian Credit Licence 391237)