What is Refinancing and How Loan Term Changes Work?

Understanding Refinance Home Loan Term Changes

When you refinance your home loan, one of the most significant decisions you'll make is whether to adjust your loan term. Many Central Coast homeowners focus solely on securing a lower interest rate during the refinance process, but changing your loan term can have an equally substantial impact on your financial position.

A loan term refers to the length of time you have to repay your mortgage. In Australia, typical home loan terms range from 10 to 30 years, though some lenders offer flexibility beyond these parameters. When you refinance, you have the opportunity to extend or shorten this timeframe, which directly affects your monthly repayments and the total interest you'll pay over the life of your loan.

Why Consider Changing Your Loan Term When You Refinance?

There are several compelling reasons why Central Coast residents might want to adjust their loan term during mortgage refinancing:

Reducing Your Repayment Period

Shortening your loan term means you'll pay off your mortgage sooner and save thousands in interest charges. If your financial situation has improved since you first took out your home loan - perhaps through a salary increase or a partner returning to work - reducing your loan term can accelerate your path to owning your property outright.

Lowering Your Monthly Repayments

Extending your loan term spreads your loan amount over more years, which reduces your monthly repayments. This strategy can improve cashflow and provide breathing room in your budget, particularly useful if you're facing increased living costs or planning major life changes.

Aligning With Your Financial Goals

Your circumstances change over time. Perhaps you initially took a 30-year loan as a first home buyer, but now you want to be mortgage-free before retirement. Or maybe you need to access equity for investment purposes and want to restructure your debt accordingly.

The Impact of Extending Your Loan Term

When you extend your loan term during a refinance, you'll generally experience lower monthly repayments. For example, if you have 20 years remaining on your current mortgage and you refinance to a new 30-year term, your repayments will decrease significantly.

However, this approach means you'll be paying interest for a longer period. Even if you secure a lower interest rate, the extended timeframe could result in paying more total interest over the life of the loan. This is an important consideration when evaluating whether extending your term makes financial sense.

Extending your loan term might be appropriate if you:

• Need to reduce your regular repayments to manage other financial commitments
• Want to consolidate into mortgage other debts with higher interest rates
• Are planning to release equity to buy the next property
• Need improved cashflow for business or investment purposes

The Benefits of Shortening Your Loan Term

Reducing your loan term can be one of the most powerful ways to save money refinancing. By committing to higher repayments, you'll reduce loan costs substantially and become mortgage-free years earlier.

Consider this scenario: if you have $400,000 remaining on your home loan with 25 years left at a variable interest rate of 6.5%, your monthly repayments would be approximately $2,693. If you refinance to lower rate of 6.0% and reduce your term to 20 years, your repayments increase to around $2,866 - only $173 more per month. However, you'll save approximately $150,000 in interest and own your home five years sooner.

Shortening your loan term works well if you:

• Have experienced income growth and can afford higher repayments
• Are coming off fixed rate and want to restructure your loan
• Want to be mortgage-free before retirement
• Have paid down other debts and can redirect that money to your mortgage
• Are receiving an inheritance or bonus that allows for higher repayments

Keeping Your Loan Term the Same

Not every refinance application needs to include a term change. You might simply want to switch to variable or switch to fixed rates, potentially access a lower interest rate, or take advantage of features like a refinance offset account or refinance redraw facility.

Maintaining your current loan term while accessing a lower rate can provide immediate savings without adjusting your repayment schedule. This approach is particularly relevant for Central Coast homeowners whose fixed rate period ending soon and who want to avoid being stuck on high rate.

What to Consider During Your Loan Review

Before deciding on a loan term change, conduct a comprehensive home loan health check. Consider:

1. Your Current Financial Position: Can you afford higher repayments if shortening the term? Do you need lower repayments to manage cashflow?

2. Your Life Stage: Are you approaching retirement? Starting a family? Planning career changes?

3. Property Valuation: Understanding your current equity position helps determine refinancing options, particularly if you're looking to unlock equity or access equity for investment.

4. Current Refinance Rates: Compare refinance rates across multiple lenders to ensure you're not just changing your term but also securing a competitive interest rate.

5. Loan Features: Does the new loan offer features you need, such as offset accounts or flexible repayment options?

6. Exit Costs: If you're coming off fixed rate before your fixed rate expiry, there may be break costs involved.

The Refinance Process for Term Changes

Changing your loan term through refinancing follows the standard refinance process. You'll need to:

• Provide updated income documentation
• Undergo a property valuation
• Complete a new credit assessment
• Review and sign new loan documents

Lenders will assess your ability to meet repayments under the new term, particularly if you're shortening the term and increasing repayments. Working with experienced mortgage brokers can help ensure your refinance application presents your financial position in the most favourable light.

Making the Right Decision for Your Central Coast Property

Deciding whether to change your loan term during a refinance mortgage is a significant financial decision. There's no one-size-fits-all answer - the right choice depends on your unique circumstances, goals, and financial capacity.

Whether you want to save on interest rate costs by shortening your term, improve monthly cashflow by extending it, or maintain your current timeframe while accessing features, Shield Mortgage Brokers can help you evaluate your options.

Our team specialises in working with Central Coast clients to conduct thorough loan reviews, compare refinance rates, and identify opportunities to save thousands through strategic refinancing. We'll help you understand the long-term implications of term changes and structure a solution that aligns with your financial objectives.

If you're paying too much interest, your fixed rate period ending soon, or you simply want to understand if changing your loan term makes sense, now is the time to take action. 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 show you exactly how different loan terms could impact your financial future. Visit our Central Coast mortgage broker page to learn more about how we can help you with your refinancing needs.