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Should you switch your home loan? There can be benefits, sure. But they come at a cost.
 

The Pros

If you get it right you could:

  • secure a lower interest rate and reduce your monthly payments
  • if you can afford higher repayments, you could reduce the term of your loan and save thousands of dollars in interest
  • switch to a more flexible loan that allows you to make extra payments when you have the money, or mix fixed and variable rates, or include a mortgage offset account
  • use the equity in your home to consolidate other debts and lower your overall borrowing costs.

 

The Cons

  • If you break a fixed rate loan because interest rates have dropped, the break cost will be calculated to compensate your lender for their loss of income. This break cost may offset much or all of the benefit to you.
  • You will pay fees and charges which may offset the gains, particularly if you plan to sell soon.
  • Be careful. You may be offered something superficially attractive — lower repayments and even a lower interest rate — but end up adding years and many thousands of dollars. (Have a look at ‘Thinking about consolidating your debts? There is a bit to consider’ for an example.)
  • If your property has fallen in value or you are having trouble paying your mortgage, you may not be able to secure a replacement loan.

 

A New Car? A Well Deserved Holiday?

Refinancing could let you use the equity you’ve built up in your home to renovate, or replace that ageing car, maybe even sneak off for a holiday overseas.

But that would also increase your debt and make the amazing power of compound interest work harder against you.

 

What are your thoughts?

Are you thinking of switching your home loan? Did we miss anything? Is there anything else you’d like to know about refinancing?

Join the conversation — leave a comment below and let us know what you’re thoughts are.