Home loan repayments are one of the largest ongoing expenses many Australian households manage.
As interest rates, household expenses and borrowing requirements change over time, some borrowers review the features, repayments and costs of their existing loan.
During that review, one common question arises. Should the comparison focus on reducing regular repayments, shortening the loan term or considering a combination of both?
Each approach may affect regular repayments, the loan term, fees and total interest differently. These factors can be compared alongside the borrower’s requirements, objectives and financial situation.
Why Borrowers Refinance
Refinancing generally involves replacing an existing home loan with a new loan, either with the current lender or a different lender.
Borrowers refinance for many reasons, including:
- Reviewing loan features
- Changing loan structures
- Consolidating debts
- Accessing equity
- Adjusting repayment arrangements
- Reviewing interest rates
A common motivation is reviewing whether ongoing repayments can be reduced.
However, reducing repayments is only one possible outcome of refinancing.
The overall effect depends on the loan structure, loan term, interest rate, fees, and individual financial circumstances.
Why Some Borrowers Prioritise Lower Repayments
When people discuss refinancing to reduce repayments, they are generally referring to lowering their regular mortgage commitment.
This may occur through:
- A lower interest rate
- Extending the loan term
- Changing repayment arrangements
- Restructuring existing debts
Lower required repayments may leave more household income available for other expenses or commitments in the short term.
The overall outcome will depend on factors such as the loan term, interest rate, fees and total borrowing costs.
The Impact of Extending a Loan Term
Extending the remaining loan term is one way repayments may be reduced.
For example, a borrower with twenty years remaining on a loan may refinance into a new thirty-year loan.
Because repayments are spread over a longer period, monthly repayments may decrease.
Extending a loan term may increase the total interest paid over the life of the loan, although the outcome will depend on factors such as the interest rate, repayment amounts and whether additional repayments are made.
Why Some Borrowers Focus on Paying Off Their Loan Sooner
Other homeowners take a different approach.
Rather than reducing repayments, they focus on reducing their loan balance more quickly.
Their motivation may include:
- reducing the outstanding loan balance
- potentially reducing total interest costs
- shortening the loan term
- working towards a user-selected debt-reduction goal
There are various ways borrowers may approach this objective.
The approaches available will depend on the borrower’s requirements, objectives, financial situation, loan conditions and applicable lender criteria.
Making Additional Repayments
One commonly discussed approach involves making additional repayments above the minimum required amount.
Where loan terms and conditions permit, additional repayments may reduce the outstanding balance more quickly.
This may reduce the total interest charged over the life of the loan, depending on the loan type, interest rate, repayment timing and lender terms.
Before making additional repayments, borrowers may consider their household cash flow, access to funds and other financial commitments. Loan conditions should also be checked, as limits, fees or restrictions may apply.
Loan Features May Influence Long-Term Outcomes
Different home loans offer different features.
Borrowers comparing refinancing options may review features such as:
- Offset accounts
- Redraw facilities
- Flexible repayment options
- Loan splitting arrangements
Available features and their operation will depend on the lender and loan product.
Borrowers may wish to understand how these features operate, including any fees, restrictions or eligibility requirements, before comparing loan options.
Comparing Repayments, Loan Terms and Total Costs
For many homeowners, the decision is not necessarily one approach or the other.
Some borrowers compare the proposed repayment amount with the remaining loan term and estimated total interest cost.
For example, a borrower reviewing refinancing may compare the proposed repayment amount, remaining loan term, total costs and rules relating to additional repayments.
Some borrowers may prefer lower required repayments for a period, while others may choose to make additional repayments where the loan terms permit.
As borrower circumstances, lender policies and loan products may change over time, some borrowers review their current repayments, rate, fees, features and available refinancing options.
The Role of Interest Rates
Interest rates naturally influence discussions around refinancing.
A lower interest rate may reduce repayments or help more of each repayment go towards the loan balance, depending on the repayment amount, loan term, fees and loan structure.
While rate comparisons can be useful, the interest rate is only one factor. Borrowers may also consider fees and charges, the remaining loan term, loan features, repayment flexibility, lender policies and their individual circumstances.
Understanding Refinancing Costs
Refinancing may not reduce repayments or total borrowing costs for every borrower and may involve fees, eligibility requirements and changes to loan features.
Depending on the circumstances, costs may include:
- Discharge fees
- Government registration fees
- Settlement or legal costs
- Application or package fees
- Valuation fees
- Break costs if leaving a fixed-rate loan early
Some lenders may advertise refinancing incentives. Any incentive should be considered alongside the new loan’s interest rate, fees, features, eligibility requirements and total costs.
Understanding the full cost of refinancing may assist borrowers when comparing potential outcomes.
The focus should not be limited to interest rates alone.
Borrowing Capacity and Eligibility
Refinancing involves a new lending assessment.
This means borrowers are generally assessed under current lending policies.
Lenders commonly review:
- Income
- Employment status
- Living expenses
- Existing liabilities
- Credit history
- Serviceability requirements
Eligibility cannot be assumed simply because the original loan was approved in the past.
Changes in lender policies and personal circumstances may influence current borrowing outcomes.
At the time of publication, APRA requires authorised deposit-taking institutions to apply a mortgage serviceability buffer of at least 3 percentage points above the applicable interest rate when assessing serviceability for new housing lending. Individual lender policies, assessment methods and any permitted exceptions may vary.
When Reducing Repayments May Be a Priority
There are situations where lower repayments may become more important.
Examples may include:
- Growing families
- Increased household expenses
- Changes in employment circumstances
- Business cash flow fluctuations
- Temporary financial pressures
In these situations, a borrower may wish to compare options involving different required repayment amounts, loan terms and total costs.
The options available will depend on the borrower’s requirements, objectives, financial situation, lender criteria and the applicable credit assessment.
When Paying Off a Loan Sooner May Be the Focus
Other borrowers may prioritise reducing debt more quickly.
Factors a borrower may consider include:
- Income has increased
- Other debts have been reduced
- The borrower’s repayment or loan-term objectives have changed
- The borrower is reviewing the proposed loan term and expected repayment timeframe
Making additional repayments may reduce the outstanding loan balance, shorten the repayment period and reduce total interest, depending on the loan terms, interest rate, repayment timing and any applicable fees or restrictions.
Borrowers may wish to consider household cash flow, access to emergency funds, other commitments, loan conditions and the potential effect of making additional repayments.
Reviewing Your Loan Regularly
A home loan may remain in place while a borrower’s circumstances, lender policies, interest rates and available loan products change over time.
Reviewing an existing loan may help borrowers understand:
- Current loan features
- Available lending options
- Repayment structures
- Indicative borrowing capacity, where relevant
- The potential costs, features and repayment implications of refinancing
This does not mean changes are always required.
A broker may compare the current loan’s rate, fees, features and repayment arrangements with available options from the broker’s lender panel. Any refinancing recommendation or application remains subject to applicable enquiries, verification, preliminary assessment, lender criteria and approval.
Monthly Repayments Are Only Part of the Overall Cost
When reviewing a home loan, it can be tempting to focus solely on the repayment amount.
While repayments are important, they are only one part of the broader picture.
The loan term, total interest cost, available features, repayment flexibility and the borrower’s circumstances may all be considered when comparing available options.
These factors may be compared when reviewing potential refinancing costs, repayment implications and available loan features.
Understanding Your Priorities Before Making Changes
Refinancing to reduce repayments and paying off a home loan sooner represent different borrowing objectives. The effects of each approach will vary between borrowers.
The options available will depend on the borrower’s requirements, objectives, financial situation, lender criteria and the results of the applicable credit assessment.
Some borrowers may focus on reducing regular repayments, while others may explore ways to reduce their loan balance over a shorter period. Each option may affect repayments, total interest, loan features and household cash flow differently. These factors may be considered alongside the borrower’s circumstances, objectives and applicable lender criteria.
Contact FinanceCorp on 1300 410 784 or email admin@financecorp.com.au to discuss a refinancing enquiry, current lender requirements and available options from the FinanceCorp lender panel. Any refinancing recommendation or application remains subject to applicable enquiries, verification, preliminary assessment, lender criteria and approval.
FinanceCorp is based in Cockburn Central, Western Australia, and provides credit assistance under Australian Credit Licence 395037. View FinanceCorp’s complaints and compliments process for further information.
Important Information
This article provides general information for educational purposes only. It does not take into account your objectives, financial situation, needs, borrowing requirements or personal circumstances. It is not a recommendation to refinance, restructure a loan, make additional repayments, access equity or apply for a particular loan, lender or credit arrangement.
FinanceCorp provides credit assistance under Australian Credit Licence 395037. The lenders and products considered depend on broker accreditation, lender-panel access, the type of lending requested, the information provided and the consumer’s circumstances. FinanceCorp does not compare every lender or loan product in the market.
Interest rates, fees, comparison rates, loan features, lending policies and assessment requirements vary between lenders and may change. References to offset accounts, redraw facilities, additional repayments and refinancing approaches are general only. Their availability, operation, costs and potential effects depend on the loan product, lender requirements and borrower’s circumstances.
Examples and scenarios are illustrative only and should not be relied upon as an indication of approval, borrowing capacity, repayment reductions, future savings, interest reductions or lending outcomes. All lending is subject to applicable enquiries, verification, preliminary assessment, lender criteria, approval, terms, conditions, fees and charges. Seek assistance from appropriately qualified financial, legal, taxation or credit professionals where required.