Refinance to Shorten Loan Term - Your Complete Guide

Discover How to Save on Interest and Own Your Home Sooner

Refinancing your mortgage to shorten the loan term can be a strategic move for homeowners looking to save on interest payments and own their home outright sooner. In Australia, where the property market is dynamic and interest rates can fluctuate, understanding the ins and outs of this financial decision is crucial. Here's a comprehensive guide to help you navigate the process.

Understanding Refinancing

Refinancing involves replacing your current mortgage with a new one, typically with different terms and interest rates. Homeowners might refinance to take advantage of lower interest rates, access home equity, or change their loan term.

Why Shorten Your Loan Term?

Shortening your loan term means you'll pay off your mortgage faster. This can significantly reduce the total amount of interest paid over the life of the loan. For example, switching from a 30-year to a 15-year mortgage term can save tens of thousands of dollars in interest payments, depending on the loan amount and interest rate.

Considerations Before Refinancing

1. Interest Rates: A key factor in deciding to refinance is the interest rate environment. If rates have dropped since you took out your original loan, refinancing to a shorter term at a lower rate can magnify your savings.
2. Financial Stability: Shortening your loan term usually means higher monthly payments. Ensure your financial situation can handle the increased expense without straining your budget.
3. Closing Costs: Refinancing isn't free. Closing costs in Australia can include application fees, valuation fees, and legal fees, among others. These expenses can range from 2% to 4% of the loan amount, so it's important to factor them into your decision.
4. Loan Features: Consider if you need features like an offset account or redraw facility. Some loans with shorter terms may not offer these benefits.

How to Refinance

1. Assess Your Needs: Clearly understand why you want to shorten your loan term and what you hope to achieve.
2. Shop Around: Compare offers from different lenders, including your current lender. Look beyond interest rates to compare fees, features, and flexibility.
3. Check Your Credit Score: Your credit score will impact the interest rates you're offered. Ensure your credit is in good shape before applying.
4. Calculate Costs and Savings: Use online calculators to estimate your new monthly payments, total interest savings, and any potential tax implications.
5. Get Your Documents Ready: You'll need to provide proof of income, employment, and other financial details. Having these documents prepared can speed up the process.
6. Apply: Once you've chosen a lender, submit your application. The lender will conduct a valuation of your property and finalise your loan details.
7. Settlement: Your new lender will pay off your existing mortgage, and you'll start making payments on your new loan.

Is It Right for You?

Refinancing to shorten your loan term is a significant decision that depends on individual financial circumstances, goals, and the current economic environment. It's wise to consult with a financial advisor to ensure that refinancing fits your long-term financial strategy.

In conclusion, refinancing to a shorter loan term can be a smart financial move for Australian homeowners under the right conditions. It requires careful consideration of your financial health, the costs involved, and the potential savings. With thorough research and planning, you can make an informed decision that aligns with your financial goals.