Refinancing to a lower interest rate means you can save money on interest. That gives you two options:

• Reduce your monthly repayments to the new, lower amount (so you save money each month).
• Keep your monthly repayments at the original, higher level (so you get ahead on your mortgage and pay it off much faster).

To get a better idea of the financial benefits of refinancing to a lower interest rate, check out this example.

When fixed rates are lower than variable rates it is a good time consider fixed rates. When you are about to go on maternity leave it is a good time consider fixed rates.

When you are looking for the security and predictability of a guaranteed interest rate or been told fixed rates are a good idea it’s time to look at your options.

Or maybe it’s the other way around, you think that interest rates are likely to trend downwards or if the fixed r? In that case, you can take advantage by refinancing from a fixed to a variable loan.

Sometimes, it is cheaper to have a basic home loan package but then as life and interest rates change you may want to upgrade to what is known as a ‘professional package’ loan.

Basic home loan packages, which are popular with first home buyers, often have these characteristics:

• Minimal fees
• Variable interest rate
• Low interest rate
• Extra repayments option

Professional packages tend to have these characteristics:

• Annual fee or monthly fees
• Split loan options
• 100% offset account
• Free Credit card
• Interest Rate discounts on Variable and Fixed rates

Sometimes it can be your situation that dictates the type of loan you have for example a basic home loan packages can be popular with first home buyers, who want a simple low-cost loan. Professional packages can be popular with more affluent borrowers and investors, who can take advantage of the offset account.

Sometimes, professional packages can include discounts on home and contents insurance (although make sure you shop your insurance around before taking any option).

If the value of your home has increased, you might be able to refinance into a larger loan.

For example, if your property was valued at $500,000 when you bought it and the bank allowed you to borrow 80%, your loan would’ve been $400,000. If the property is now worth $600,000, you might be able to increase your loan to $480,000 (as 80% of $600,000 is $480,000).

You could then spend or invest that extra money or you could park it in an offset account so it’s on hand at a later date. The thing to remember here is banks work under responsible lending guidelines and this mill mean they need to understand what you want the money for. Each Bank or Lender will have a different policy on what they accept.

Sometimes, when you get a loan directly from the lender, the bank will give you a confusing loan structure or a structure that is best for the bank.

In that case, you might want to refinance to a new loan structure that makes it easier to pay off your loan or buy an investment property. Or when talking to The Home Loan Guy you begin to understand there is a better and structure that works for you.

If you’re like many Australians, you might have multiple debts, including a home loan, car loan, personal loan, credit card and tax debt.

So, you might benefit from rolling all those debts into a new mortgage. This could help in three ways:

1. Reducing your monthly interest bill (because your home loan interest rate will generally be lower than the rate being charged by the other debts)
2. Reducing your monthly fees (because now you pay only one set of fees, instead of several)
3. Saving you time (because now you make only one payment per month, instead of several)

That said, refinancing to consolidate debt might actually cost you more money. Imagine for example, you consolidate a car loan into your mortgage. That would allow you to switch from an interest rate of, say, 8% (for your car loan) to, say, 3% (for your mortgage). However, a 3% loan you pay off over 30 years will actually cost you more in interest than an 8% loan you pay off over 5 years:

• 8% loan paid off over 5 years = $4,332 in interest
• 3% loan paid off over 30 years = $10,355 in interest

To avoid this, you need to increase your repayments on the new loan, so you pay it off faster. You may be comfortable with the repayments on both loans and find repaying both easy. In this case it is a perfect reason to refinance. What you then do is apply the same repayment from both loans into the one new home loan.

This will then accelerate the payments on the car loan so you pay it off quicker.

Another reason you might refinance is to borrow against the equity in your property.

Wait, what is ‘equity’ again? Well, equity is the difference between the current value of your property and the balance remaining on your home loan. For example, if your property is worth $800,000 and you owe $500,000 on your loan, you have equity of $300,000.

Another way of thinking about equity is that you ‘own’ $300,000-worth of your property while your lender ‘owns’ $500,000-worth.

Most lenders will let you borrow against your equity – for example to pay for renovations, the deposit on an investment property, a family holiday or a new car. However, you won’t be able to access 100% of your equity. Instead, you’ll probably be allowed a maximum of 80% (assuming the lender believes you can repay the new loan).

To continue the earlier example, you’d be able to access $140,000 of equity:

Some lenders will allow you to increase your loan from 80% to 90% – which, in this case, would increase your available equity from $140,000 to $220,000.

However, if you borrow above 80%, you generally have to pay lender’s mortgage insurance (LMI). In this particular example, your LMI premium would be about $18,000.

Some lenders would insist the LMI premium be subtracted from your loan, which would reduce the
amount you could borrow from $220,000 to $202,000. Other lenders would allow you to capitalise (i.e. add) the LMI into your loan, which would increase the loan you are repaying.

Please note that lenders often charge higher interest rates for mortgages with a loan-to-value ratio
above 80% plus charge the LMI fee.

Refinancing to pay for renovations.

There are two types of renovations you can do – non-structural and structural. The two different types of renovations require two different types of loans.

Non-structural renovations are changes that don’t alter the structure of the property, such as building a new kitchen or bathroom. For this type of job, lenders will generally provide a ‘cash out’ loan (where the lender gives you cash to spend). Some lenders will ask you to provide quotes to verify the expenses.

Structural renovations are changes that do alter the structure of the property, such as adding an extension or doing a knock-down and rebuild. For this type of job, lenders will generally expect you to get a construction loan. As part of the process, you’ll need to prove you have council approval and a contract with a builder.

You may have to pay a break fee – potentially of thousands of dollars – if you exit a fixed-rate loan early (i.e. two years into a three-year term).

Lenders charge break fees to cover the cost of their lost revenue, so the size of the fee is determined by how much time is left on the fixed-rate loan and the interest rate being charged.

If you have a fixed rate loan now, call your existing lender and get a pay out quote to see if this is an issue.

Lenders incur admin costs when they close out an existing loan. These costs will get passed on to you in the form of a discharge fee. A typical discharge fee is about $350.

Lenders incur admin costs when they set up a new loan. These costs may get passed on to you in the form of an application / establishment fee. A typical application / establishment fee is $600, although a lot of lenders will waive this fee to attract your business.