If your home loan repayments are becoming unmanageable, refinancing your home loan can relieve financial stress and allow you to renegotiate the terms of your mortgage to better suit your needs and goals.
Of course, the decision to refinance should be carefully considered depending on current interest rates, your personal financial situation, and whether you want to pay off your home loan quicker.
As of 2023, Australian home loan rates are continuing to rise. If you have a variable home loan or you’re soon exiting your fixed-rate mortgage, the strain of paying rising interest rates can lead to a significant financial burden.
Here are five reasons why you should consider refinancing your home loan in 2023.
1. Lower Interest Rates
If you took out your home loan when the average interest rate was exceptionally high, you can choose to refinance with a new or existing lender to reduce your monthly home loan repayments. This can make your existing debt more manageable and help you save money in the long term.
The big four banks of Australia predict that the national interest rate will begin to drop at the end of 2023, so choosing to refinance your home loan in 2023 is an excellent way to cut the amount you owe to lenders.
For some, switching to a lower-interest-rate home loan is a worthwhile strategy. You’ll not only be able to reduce the amount you owe on your loan, but you won’t need to increase your budget – helping you to pay off your home loan faster.
2. More Manageable monthly repayments
Many more Australians face mortgage stress in 2023, with cash rate hikes since May 2022. Mortgage repayments are already causing major financial strain for many, with 880,000 Australians facing an end to their fixed-rate home loans this year. Mortgage interest rate for a three-year fixed-rate home loan currently ranges from 5.25% to 5.99%, which could dramatically increase the cost of monthly loan repayments.
If you choose to refinance your home loan, you’ll likely be able to reduce your mortgage repayments to make them more manageable going into 2023 and 2024. Home loan refinancing is designed to give you a better interest rate on your new loan, effectively helping you to save money while still making regular payments.
Home loan refinancing won’t be enough for some, and the rising interest rate will continue to cause significant strain. If this is the case, ask your mortgage broker if switching to making interest-only payments will be better for your scenario or if they can ask your current lender to look to extend the length of your home loan.
3. Reduced Loan Term
When you refinance your home loan, you can choose to shorten the term to pay off your loan sooner. For instance, if you’re three years into a 30-year home loan with your current lender, you can switch to a 15-year term with your new loan. While your monthly repayments will be considerably higher, you’ll face less debt in the future.
4. Access Home Equity
If you’re a homeowner with significant equity in your property, choosing to refinance your home loan can help you to access tax-free cash built up in your home. By taking out a new loan, known as a cash-out refinance loan, you’ll have funds that can be used for home renovations, debt consolidation, or as retirement funds.
Accessing home equity is only an option for certain homeowners with significant equity already built up in their property. They will likely be far through their existing home loan. If you’re early into your home loan with your current lender, you won’t be eligible for a cash-out refinance loan.
5. Change your home loan type
For Australians on an adjustable-rate mortgage, interest hikes can lead to unmanageable monthly repayments, causing unpredictability and increased mortgage stress.
By refinancing your home loan and switching from a variable home loan to a fixed-rate loan, you’ll face more stability and predictability when making your monthly mortgage repayments, allowing you to budget better and save your disposable income.