When you're considering refinancing your home loan, one of the most important decisions you'll face is whether to change your loan term. This choice can significantly impact your financial situation, affecting everything from your monthly repayments to the total amount you'll pay over the life of your loan.
What does changing your loan term mean?
Your loan term is simply the length of time you have to repay your home loan. In Australia, most home loans have terms between 25 and 30 years, though some lenders offer terms as short as 15 years or as long as 40 years. When refinancing, you have the opportunity to adjust this timeframe up or down, depending on your current needs and goals.
Changing your loan term during refinancing isn't just about picking a new number of years. It's about aligning your loan structure with your current financial situation and future objectives.
Shortening your loan term: The pros and cons
Reducing your loan term can be an attractive option if your income has increased since you first took out your mortgage. Here's what you need to consider:
Advantages of a shorter loan term:
• You'll pay less interest overall
• Build equity in your property faster
• Become mortgage-free sooner
• May qualify for accessing a lower interest rate from some lenders
Potential drawbacks:
• Higher monthly repayments
• Less flexibility in your monthly budget
• May limit your ability to consolidate debts or access other loan options
Extending your loan term: When it makes sense
Sometimes, extending your loan term can provide the financial breathing room you need. This approach can help reduce loan repayments, making your mortgage more manageable month to month.
Ready to get started?
Book a chat with a Finance & Mortgage Broker at LBK Lending today.
Benefits of a longer loan term:
• Lower monthly repayments
• More cash flow for other expenses or investments
• Opportunity to consolidate debts into your mortgage
• Potential to release equity to buy the next property
Things to keep in mind:
• You'll pay more interest over the life of the loan
• It takes longer to build equity in your property
• You'll be making repayments for a longer period
How your loan amount affects term decisions
Your current loan amount plays a crucial role in determining the most suitable term length. If you're looking at releasing equity in your property for renovations, investments, or other purposes, extending your loan term might help manage the increased loan amount while keeping repayments affordable.
Conversely, if your loan amount has decreased significantly since your original mortgage, you might find that maintaining or even shortening your term is more feasible than you initially thought.
Interest rate considerations
The type of interest rate you choose can influence your term decision. Whether you opt for a variable interest rate or fixed interest rate, the impact on your repayments will vary depending on your loan term.
With refinance interest rates fluctuating, a longer term might provide a buffer against potential rate increases, while a shorter term can help you take advantage of current low rates by paying off your loan faster.
The application process for term changes
When you decide to change your loan term during refinancing, the application process involves several key steps:
- Financial assessment: Your broker will review your current financial situation, including income, expenses, and assets
- Documentation: You'll need to provide bank statements and other financial documents
- Loan comparison: Access loan options from banks and lenders across Australia to find suitable terms
- Eligibility check: Check eligibility for special lender policies that might offer additional benefits
The streamlined application process that many lenders now offer can make changing your loan term more straightforward than you might expect.
When your fixed rate period is ending
If your fixed rate period ending is approaching, this presents an ideal opportunity to reassess your loan term alongside your interest rate options. Many Bulimba homeowners find this timing perfect for conducting a comprehensive home loan health check.
During this review, you can explore whether maintaining your current term makes sense or if adjusting it would align with your evolved financial goals. This is also when you can potentially access better loan options that weren't available when you first secured your mortgage.
Making the right choice for your situation
Deciding whether to change your loan term during refinancing isn't a one-size-fits-all decision. Your choice should reflect your current financial capacity, future goals, and risk tolerance. Some homeowners prioritise lower monthly payments to free up cash flow, while others focus on paying off their mortgage as quickly as possible.
Consider factors such as your age, career stage, family circumstances, and other financial commitments. If you're planning major life changes or investments, your loan term strategy should accommodate these plans.
Refinancing offers a valuable opportunity to realign your home loan with your current needs. Whether you choose to shorten your term to build equity faster or extend it to improve your monthly cash flow, the key is making an informed decision based on your unique circumstances.
Call one of our team or book an appointment at a time that works for you. We'll help you explore your options and find the loan structure that supports your financial goals.
