Refinancing and Changing Your Loan Term: What to Know

When you refinance your home loan, you're not just searching for a lower interest rate - you also have the opportunity to change your loan term. This decision can significantly impact your monthly repayments, the total interest you'll pay over the life of your loan, and how quickly you'll own your home outright.

For homeowners in Thornlie considering home loan refinancing, understanding the implications of adjusting your loan term is crucial. Whether you're looking to reduce loan costs, improve cashflow, or achieve financial goals sooner, the loan term you choose during the refinance process plays a vital role.

Why Refinance Your Home Loan?

Before diving into loan term changes, it's worth understanding the broader reasons why refinance makes sense. Common motivations include:

• Accessing a lower interest rate to save money refinancing
• Releasing equity in your property for investment or renovations
• Consolidating debts into your mortgage to reduce overall interest
• Switching between fixed interest rate and variable interest rate options
• Obtaining better features like a refinance offset account or refinance redraw facility
• Coming off a fixed rate period and wanting to avoid higher rates

A home loan health check with Simple Lending can help you determine if refinancing is right for your situation.

Understanding Loan Term Changes

Your loan term is the total length of time you have to repay your mortgage. Standard loan terms in Australia typically range from 15 to 30 years, though some lenders offer shorter or longer options.

When you refinance your home loan, you can either:

1. Keep the same remaining term from your original loan
2. Extend the loan term to reduce monthly repayments
3. Shorten the loan term to pay off your mortgage faster

Each option has distinct advantages and trade-offs that align with different financial situations and goals.

Extending Your Loan Term

Extending your loan term when you refinance mortgage products can significantly improve your cashflow by reducing your monthly repayments. This option appeals to homeowners who:

• Need to improve their monthly budget flexibility
• Want to free up funds for other investments or expenses
• Are experiencing temporary income reductions
• Want to access equity while keeping repayments manageable

The Benefits:

• Lower monthly repayments that are easier to manage
• Improved cashflow for day-to-day expenses
• Potential to invest the difference elsewhere
• Reduced financial pressure during challenging times

The Considerations:

While lower repayments sound attractive, extending your loan term means:

• You'll be paying too much interest over the life of the loan
• You'll remain in debt for a longer period
• You'll build equity more slowly
• Your total loan amount paid will be considerably higher

For example, if you have $400,000 remaining on your mortgage with 20 years left at 6% interest, your monthly repayments would be approximately $2,866. If you refinance and extend this to 30 years at 5.5% (a lower interest rate), your monthly repayments drop to around $2,271 - saving $595 per month. However, you'll pay roughly $160,000 more in total interest over the extended period.

Shortening Your Loan Term

Reducing your loan term when you refinance home loan products accelerates your path to debt freedom and can save thousands in interest payments. This strategy suits homeowners who:

• Have increased their income since taking out their original loan
• Want to own their home outright before retirement
• Can comfortably afford higher monthly repayments
• Are focused on minimising total interest paid

The Benefits:

• Save money refinancing by paying significantly less total interest
• Build equity faster in your property
• Achieve debt freedom sooner
• Reduce the impact of interest rate fluctuations over time
• Own your home outright at a younger age

The Considerations:

Shortening your loan term requires commitment:

• Higher monthly repayments that reduce budget flexibility
• Less capacity to handle unexpected expenses
• Potentially less funds available for other investments
• Reduced borrowing capacity if circumstances change

Using the same $400,000 example, if you refinance to a 15-year term at 5.5%, your monthly repayments would increase to approximately $3,267 (about $400 more than the 20-year option). However, you'd save roughly $140,000 in total interest compared to the 30-year option and own your home 15 years sooner.

Finding the Right Balance

Many Thornlie homeowners find that maintaining a moderate loan term while taking advantage of loan features offers the optimal approach. Consider these strategies:

Use Offset Accounts: Keep your official loan term at 30 years for lower minimum repayments, but park savings in a refinance offset account. This reduces the interest you pay while maintaining flexibility. If you need the funds, they're accessible - unlike extra repayments on some loans.

Voluntary Repayments: Make additional repayments when possible while keeping your official term longer. This gives you the option to revert to minimum repayments if your circumstances change.

Refinance Redraw Facility: Some loans allow you to make extra repayments and redraw them if needed, combining the benefits of paying down your loan faster with maintaining access to those funds.

Regular Loan Review: Conduct a loan review every few years to reassess whether your current loan amount and term still align with your financial situation and goals.

Special Considerations for Thornlie Property Owners

For residents in Thornlie and surrounding Perth suburbs, several factors may influence your refinancing decision:

• Perth property valuations have fluctuated in recent years, affecting your available equity
• Western Australian first home buyer support programs may impact investment property decisions
• Local market conditions influence whether to access equity for investment
• Proximity to employment hubs and future infrastructure developments affect long-term property values

If you're looking to access equity for investment purposes or considering buying your next home, the loan term you choose during refinancing will impact how much equity you can release and your ongoing serviceability.

Fixed Rate Expiry and Loan Term Changes

Many Australian homeowners are currently coming off fixed rate periods that were secured during historically low interest rate environments. If your fixed rate period ending, refinancing provides an ideal opportunity to reassess your loan term.

When your fixed rate expiry approaches, you can:

• Refinance to lower rate products with a different term
• Switch to variable interest rate products with adjusted repayments
• Lock in a rate with a new fixed period and modified loan term
• Potentially access a better interest rate while optimising your term

Homeowners stuck on high rates following fixed rate periods should act quickly, as better rate options are typically available through the refinance process.

The Refinance Application Process

When you're ready to move forward with your refinance application, you'll need to provide:

• Recent payslips or financial statements
• Details of your current home loan
• Property valuation information
• Identification documents
• Details of other debts and expenses

The refinance process typically takes 2-6 weeks, depending on the lender and complexity of your situation. Working with a mortgage broker streamlines this process, as we handle much of the paperwork and liaise with lenders on your behalf.

Making Your Decision

When deciding whether to adjust your loan term during refinancing, consider:

1. Your age and retirement plans: How many working years do you have left?
2. Income stability: Is your income secure and likely to grow?
3. Other financial goals: Do you want to invest elsewhere or focus on your home?
4. Risk tolerance: Are you comfortable with higher repayments?
5. Life stage: Are you planning major expenses like children's education?
6. Current interest rates: What can you potentially access as a better interest rate?

Compare refinance rates across multiple lenders and model different scenarios before making your decision. Current refinance rates vary significantly between lenders, and the right loan term depends on which interest rate you secure.

Moving Forward with Confidence

Changing your loan term during the refinance process is a significant decision that requires careful consideration of your current circumstances and future goals. Whether you choose to extend your term to improve cashflow, shorten it to save on interest costs, or maintain your current trajectory, the key is ensuring your decision aligns with your broader financial strategy.

At Simple Lending, we work with Thornlie clients to analyse their unique situations, compare options across multiple lenders, and find refinancing solutions that support their goals. We'll help you understand how different loan terms impact your repayments and total interest, and ensure you're not paying too much interest on your home loan.

Ready to explore your refinancing options and determine the ideal loan term for your situation? Call one of our team or book an appointment at a time that works for you. We'll conduct a comprehensive home loan health check and help you access equity, reduce loan costs, or improve your loan features through a refinance that's tailored to your needs.