Refinancing your home loan can allow you to take advantage of a lower interest rate, better features, or more attractive terms and conditions - ideally all three.
But if you're switching to a new loan, there's a chance your loan term may reset to 30 years, no matter how many years you've already been paying off your previous mortgage.
This comes with a few implications that can be both positive and negative, depending on your circumstances. Let's consider them.
Lower repayments
If you're borrowing roughly the same amount of money you had owing on your old home loan, resetting your new loan to the maximum term can mean your repayments will be significantly lower.
This could be what you're aiming for in refinancing your current loan. If that's the case, spreading your repayments over the longest term possible is one way to ease cash flow pressures.
Pay more interest overall
The trade-off with having lower repayments over a longer term is that you will end up paying more in interest over the life of your loan.
Some lenders will only refinance if you take up a new 25- or 30-year loan term. If that's the case, you could end up with a loan with a much longer term than the years left to pay off your current mortgage.
If that's not your intention, make sure you negotiate your new loan with a similar term to your current one - or find a lender who is prepared to do that.
See also: 11 things to consider before refinancing your mortgage
Extend the loan term but pay extra
You may be able to enjoy the best of both worlds by opting for the longest loan term available and making extra repayments when you can.
This strategy can set you up to make minimum repayments to get you through an immediate or short-term financial squeeze and give you the option of stepping up your repayments as you get back on your feet.
Alternatively, if you've got a flexible home loan, you can make extra payments from the outset. If you're able to make similar repayments to your old home loan, you'll be on track to pay off your refinanced loan much earlier.
Signing up for the longest loan term can help you build up some cushioning with your repayments over the life of the loan but ultimately, it depends how disciplined you are in paying extra that will see you save on interest and reduce your loan term.
Our Extra and Lump Sum Payment Calculator will give you some idea of how much interest - and time - you could save.
See also: Pros and cons of refinancing your home loan
Savings.com.au's two cents
At the end of the day, you'll need to be clear on what it is you're aiming to achieve by refinancing your home loan.
Extending the term of your loan is one way to reduce your regular repayments. This may be exactly why you're refinancing but you need to understand it could also see you pay far more in interest over the life of the loan than your current home loan would.
If you're prepared to take the extra hit in interest to get you through an unexpected or short-term cash flow issue, you can look to increase your repayments when your financial position improves.
If that's your plan, you'll need to ensure your refinanced home loan gives you the flexibility to do that without penalty. Generally, a home loan with a variable interest rate or an offset/redraw facility will allow you to make unlimited extra payments whenever you're able.
Refinancing any home loan should involve some serious calculations before you take the leap. It's wise to also consider the question of the optimum loan term for your purposes to ensure what you sign up for matches your refinancing intentions. A good mortgage broker may be able to run you through your options so that you can determine the best term for your circumstances.
If you're looking to refinance your home loan, be sure to research the market first to find a loan that's going to line up with your reasons for wanting to switch to another loan product.
The table below features some of the most competitive interest rates on the market and is a good place to start.
| Lender | Home Loan | Interest Rate | Comparison Rate* | Monthly Repayment | Repayment type | Rate Type | Offset | Redraw | Ongoing Fees | Upfront Fees | Max LVR | Lump Sum Repayment | Extra Repayments | Split Loan Option | Tags | Features | Link | Compare | Promoted Product | Disclosure |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
5.94% p.a. | 5.98% p.a. | $2,978 | Principal & Interest | Variable | $0 | $530 | 90% |
| Promoted | Disclosure | ||||||||||
5.89% p.a. | 5.80% p.a. | $2,962 | Principal & Interest | Variable | $0 | $0 | 80% |
| Promoted | Disclosure | ||||||||||
5.99% p.a. | 6.02% p.a. | $2,995 | Principal & Interest | Fixed | $0 | $0 | 60% |
| Promoted | Disclosure | ||||||||||
5.93% p.a. | 5.93% p.a. | $2,975 | Principal & Interest | Variable | $0 | $395 | 70% | Disclosure |
