Understanding Loan Term Changes When Refinancing

When most people in Ringwood East think about refinancing their home loan, they focus on securing a lower interest rate. While that's certainly important, there's another powerful tool you can use during the refinance process: changing your loan term. Understanding how adjusting your loan term works can help you save thousands of dollars or improve your cashflow depending on your circumstances.

What Is a Loan Term?

Your loan term is the length of time you have to repay your mortgage. In Australia, the standard home loan term is 30 years, but you can choose terms ranging from as short as 5 years to as long as 40 years depending on your lender. When you refinance your mortgage, you have the opportunity to change this term to suit your current financial situation and goals.

Shortening Your Loan Term

One of the most powerful strategies when you refinance home loan is reducing the loan term. If you've been paying your mortgage for several years and your income has increased, you might be able to handle higher repayments. Here's why you might consider it:

Benefits of a Shorter Loan Term:

• Pay off your mortgage sooner and become debt-free faster
• Save substantially on interest charges over the life of the loan
• Build equity in your property more quickly
• Potentially access a better interest rate, as shorter terms sometimes attract lower rates

For example, if you have 25 years remaining on your mortgage and refinance to a 15-year term with a lower interest rate, you could save tens of thousands of dollars in interest payments. The trade-off is that your monthly repayments will be higher, so you need to ensure your budget can handle the increase.

Extending Your Loan Term

On the other hand, extending your loan term when you refinance can improve cashflow by reducing your regular repayments. This might make sense if:

• You're experiencing financial pressure and need to reduce monthly expenses
• You want to access equity for investment purposes and need to keep repayments manageable
• You're planning to consolidate into mortgage other debts and want to spread the repayments over a longer period
• You've had life changes like starting a family or starting a business

While extending your loan term means you'll pay more interest over the life of the loan, it can provide breathing room in your budget and help you avoid financial stress.

Resetting Your Loan Term

Here's something many homeowners in Ringwood East don't realise: when you refinance, you might accidentally reset your loan term back to 30 years without meaning to. If you've already been paying your mortgage for 5 years and you refinance to a new 30-year term, you've just added 5 years to your total repayment period.

This is where a home loan health check with Craft Financial becomes valuable. We'll help you understand exactly how different loan terms will impact your finances and ensure you're making an informed decision about your mortgage refinancing.

Combining Term Changes with Rate Improvements

The real power comes when you combine a term adjustment with accessing a lower interest rate. Let's look at a scenario:

Imagine you have a $500,000 loan amount with 28 years remaining at 5.5% interest. Your monthly repayments are around $2,840. If you refinance to lower rate of 4.8% and reduce your term to 20 years, your repayments might increase to around $3,220 per month. That's an extra $380 per month, but you'd:

• Pay off your mortgage 8 years sooner
• Save over $150,000 in interest charges
• Own your home outright while you're still working

Fixed Rate Period Ending? Perfect Time to Review

If you're coming off fixed rate period, now is an ideal time to review your loan term alongside your interest rate options. Many homeowners find themselves stuck on high rate variable interest rates after their fixed rate expiry, and this is when a refinance application makes real financial sense.

You can choose to:

• Switch to variable rate with a different loan term
• Lock in rate again with a fixed interest rate and adjust your term
• Split your loan between fixed and variable with different terms for each portion

Other Considerations When Changing Loan Terms

When you're planning to move mortgage or refinance home loan with a different term, keep these factors in mind:

Property Valuation: Your lender will need to assess your property's current value. If your property has increased in value, you might be able to unlock equity or access better rates.

Loan Review Requirements: Lenders will reassess your financial situation, including income, expenses, and borrowing capacity. Changes in your circumstances since you first took out the loan will be considered.

Features and Options: Changing your loan term is also a chance to compare refinance rates and ensure you're getting features like a refinance offset account or refinance redraw facility that can help you reduce loan costs.

Life Stage Alignment: Your loan term should align with your life goals. Want to retire debt-free? Time your loan term to finish before retirement.

Why Refinance with Term Adjustments?

The question of when to refinance isn't just about rate - it's about whether your current loan structure still suits your life. Common reasons to refinance with a term change include:

• You want to save money refinancing by both lowering your rate and shortening your term
• You need to release equity in your property to buy the next property or invest
• Your fixed rate period is ending and you want to restructure completely
• You're paying too much interest and want to reduce the total cost of your loan
• You want to cash out refinance equity for renovations while adjusting your term to suit

Getting Started

As your local mortgage broker in Ringwood East, Craft Financial can help you understand exactly how loan term changes will impact your situation. We'll run the numbers, compare refinance rates from multiple lenders, and show you different scenarios so you can make an informed decision about your home loan refinance.

Every situation is different, and what works for one homeowner might not work for another. That's why personalised advice is so important when you're considering mortgage refinancing.

Whether you're looking to save on interest rate charges, improve your monthly cashflow, access equity, or simply ensure your loan still suits your needs, we're here to help. Our team at Craft Financial understands the Ringwood East property market and can guide you through the refinance process with clarity and confidence.

Call one of our team or book an appointment at a time that works for you. Let's review your current situation and explore whether changing your loan term could help you reach your financial goals sooner.