When it comes to choosing the best home loan for your refinancing needs, it’s crucial you compare a range of factors, including interest rate type, loan term and features. Different home loan types may suit different homeowner needs.
Fixed vs variable
Fixed interest rates
A fixed interest rate home loan is one in which the rate is locked in, and will not fluctuate throughout the fixed period - typically 1-5 years. If you’re the type of home loan customer that loves stability in your budget and knowing exactly how much you’ll repay in monthly mortgage payments, a fixed rate loan may be worth considering.
Variable interest rates
A variable interest rate home loan is subject to market fluctuations, meaning that if the lender were to change its interest rates, your rate would move as well. Interest rates on mortgages are mostly influenced by the Reserve Bank of Australia (RBA)’s cash rate. When the cash rate moves, so too should your variable interest rate - for good and for bad.
Also, a lender will typically reserve its features, such as an offset account, for its variable rate loans. If loan features are important to you, it is worth keeping this in mind.
Split rates
It can be challenging to choose between the benefits of fixed and variable rates. This is where a split rate loan comes in. As the name suggests, the lender allows you to split your interest repayments between a fixed and variable rate. It does not have to be split 50/50, but could be 20% variable and 80% fixed, for example.
A split rate loan may allow you to protect a portion of your repayments from fluctuations in the market, while taking advantage of any interest rate drops and nabbing helpful home loan features in the process.
Loan term
The loan term is crucial to consider when choosing your ideal refinancing loan. A typical loan term is 25-30 years. If you’ve been repaying your mortgage for some time now, you want to ensure you try and match your remaining loan term with the new loan. Refinancing and extending your loan term back to a full 30 years might not be ideal, as it could see you paying tens of thousands of dollars more in interest over time.
By matching your new loan term with what’s left on your current mortgage, you could potentially pay off your debt sooner while avoiding unnecessary interest expenses. The longer the loan term, the more interest you’ll likely end up paying in the end, despite switching to a lower interest rate. If you’ve already made substantial progress in paying off your current loan, opting for a similar or shorter term during refinancing could help you save some money and own your home sooner.
Features to consider
When comparing your refinancing options, home loan features can be a priority for some homeowners. After all, when used correctly, they may save you in the long run.
Offset accounts
An offset account is a linked transaction account that helps to reduce, or ‘offset’, the interest charges on your mortgage. Any funds you deposit into this transaction account will help to lower the amount of interest the lender may charge you. For example, if you had a $600,000 home loan with $50,000 in the offset account, you may only be charged interest as if your loan balance was actually $550,000.
Extra repayments
Some lenders may allow you to make extra repayments on your home loan to help you chip away the principal owing and pay off your debt faster than the loan term. Making additional repayments is arguably one of the most successful ways a homeowner can pay off their mortgage early.
Redraw facility
Wouldn’t you love to access the extra repayments you’ve made into your mortgage for a rainy day? This is where a redraw facility comes in. You may be able to draw down on some or all of the extra repayments you’ve made into your mortgage over the years if your loan offers a redraw facility.
Home loan portability
If you’re planning on selling your home and purchasing a new one at some point, you may want to consider a portable mortgage. Home loan portability is a feature that allows homeowners to stay on the same mortgage but change the security (the property).
This is considered a more affordable alternative to refinancing, as you can bypass a lot of the fees and costs involved in switching providers, while maintaining the same linked bank accounts and other credit products. This may be worth considering if your current home loan provider already offers portability.
