How to Refinance to a Shorter Loan Term Without Increasing Payments
Refinancing your home loan to a shorter term can be an excellent way to save on interest and own your home sooner. However, many homeowners worry that shortening their loan term will lead to higher monthly repayments. This comprehensive guide will show you how to refinance to a shorter loan term without increasing your payments, using strategies tailored for the Australian market.
Understanding the Benefits of a Shorter Loan Term
Before diving into the strategies, it’s important to understand why shortening your loan term can be beneficial:
- Lower total interest paid: By paying off your loan faster, you’ll pay less interest over the life of the loan.
- Build equity faster: A shorter term means you’re paying more towards the principal each month, building equity in your home more quickly.
- Earlier debt freedom: You’ll be mortgage-free sooner, providing greater financial flexibility in the future.
Strategies to Shorten Your Loan Term Without Increasing Payments
1. Secure a Lower Interest Rate
The key to refinancing to a shorter term without increasing payments is to find a significantly lower interest rate. In the current Australian market, there are often substantial differences between rates offered to new customers and those given to existing ones.
For example, if you have a $500,000 loan with 25 years remaining at an interest rate of 6.64%, refinancing to a rate of 6.14% could decrease your monthly payments by $171, resulting in savings of $51,000 over the life of the loan, according to data from Loanscope.
Action step: Use comparison websites like Canstar, RateCity, or Finder to research current competitive rates in the Australian market.
2. Take Advantage of Your Improved Loan-to-Value Ratio (LVR)
If you’ve been paying your mortgage for several years, your loan-to-value ratio has likely improved. A lower LVR can often qualify you for better interest rates.
Action step: Calculate your current LVR by dividing your outstanding loan balance by your property’s current value. If it’s below 80%, you’re in a strong position to negotiate better rates.
3. Leverage Your Credit Score
A strong credit score can help you secure a lower interest rate. In Australia, credit scores typically range from 0 to 1,000 or 0 to 1,200, depending on the credit reporting agency.
Action step: Check your credit score for free through services like Credit Savvy or GetCreditScore. If your score has improved since you first took out your mortgage, highlight this when negotiating with lenders.
4. Consider Splitting Your Loan
Some lenders offer the option to split your loan, allowing you to refinance a portion to a shorter term while keeping the rest on your current term. This can help you benefit from a shorter term without significantly impacting your repayments.
Action step: Discuss loan splitting options with potential lenders or a mortgage broker.
5. Use an Offset Account Effectively
Many Australian lenders offer offset accounts, which can be a powerful tool for effectively shortening your loan term without changing your repayment structure.
Action step: If you refinance to a loan with an offset account, deposit any extra funds into this account. While your repayments stay the same, you’ll be reducing the interest charged, effectively shortening your loan term.
Steps to Refinance to a Shorter Term
- Evaluate Your Current Loan: Use your lender’s online portal or contact them directly to understand your current loan terms, including interest rate, outstanding balance, and remaining term.
- Research and Compare Options: Use comparison websites and speak with multiple lenders to find the best rates and terms available for your situation.
- Calculate Potential Savings: Utilise refinance calculators provided by lenders like Commonwealth Bank or loans.com.au to estimate your potential savings and new loan term.
- Gather Necessary Documentation: Prepare documents such as proof of income, bank statements, and identification to streamline the application process.
- Apply for Refinancing: Submit applications to your chosen lenders. Many Australian lenders now offer online applications for convenience.
- Review and Accept Offers: Carefully compare offers, paying attention to both the interest rate and comparison rate, which includes fees and charges.
- Complete the Refinance Process: Work with your new lender to finalise the refinance, including property valuation and settlement.
Potential Pitfalls to Avoid
- Refinancing Costs: Be aware of potential costs such as application fees, valuation fees, and break costs for fixed-rate loans. Ensure these don’t outweigh your potential savings.
- Lenders Mortgage Insurance (LMI): If your LVR is above 80%, you may need to pay LMI again, even if you paid it on your original loan.
- Honeymoon Rates: Be cautious of introductory rates that revert to higher rates after a certain period.
Refinancing to a shorter loan term without increasing your payments is achievable with careful planning and research. By securing a lower interest rate, leveraging your improved financial position, and utilising features like offset accounts, you can potentially save thousands in interest and own your home sooner. Remember to thoroughly compare options and consider seeking advice from a financial professional or mortgage broker to ensure you’re making the best decision for your circumstances.
By following these strategies and being diligent in your approach, you can take advantage of the competitive Australian mortgage market to improve your financial position and achieve your property goals sooner.