Thinking of switching your home loan in Sydney? Switch to a shorter term. It’s a great way to pay off your mortgage faster. But it’s important to weigh the benefits against the potential drawbacks like any major financial decision.
The Ol’ Switcheroo – Long Term to Short Term
This is when you take out another loan to replace your existing one. The new one is shorter than your previous one. The idea is that you would pay your house faster. But it also affects how much you pay monthly. Also your overall interest.
The Benefits
1. Pay Off Your Loan Sooner
Switching to a shorter term lets you become mortgage-free faster. You could have a paid-for house in half the time or even faster instead of lugging around your loan for 3 decades. The property is now yours and you’ll be off the hook from monthly payments. Giving you peace of mind in addition to better financial wiggle room.
2. Save on Interest Costs
Imagine this. A $500,000 30-year mortgage at 5% interest. In the course of that term, your interest payments will total $466K.
For example, if you refinanced to a 15-year loan with a 3.5% interest rate. Even then, you will only pay about $143,000 in interest.
So moving to the short term and lower rate will save you over $320,000 in interest alone. You’ll pay more each month. But you’ll still save tens of thousands.
3. Build Equity Faster
You will make larger payments each month with a shorter mortgage term. This means you can build home equity faster. It is beneficial if you’re looking to sell your home in the future. You can also gain access to that equity for other financial goals. Things like renovations or investments.
The Cons of Refinancing to a Shorter Loan Term
1. Higher Monthly Payments
By refinancing to a shorter term, you’re choosing the option to get things paid off sooner. Since you are making liquidations in less years, the payment per month will be greater than with a loan that has a term stretched across more years. Refinancing from a 30-year term to a 15-year term is going to nearly double your monthly payments, and the extra cost can seriously stretch the limits of your budget if your income isn’t enough.
2. Less Flexibility in Your Budget
Higher monthly payments mean less financial freedom for other expenses This could necessitate reducing vacations, investments and other big-ticket purchases. This is to help you pay your mortgage. But think about it carefully. Is it beneficial in the long run? Won’t it stretch you out too thin financially?
3. Refinancing Costs
Fun fact: Refinance closing costs? — yup, those too. This may include costs for appraisals, loan origination or title insurance. And they can be as small as 2% of your loan and up to 6%. Just ensure that the potential savings you receive with a lower rate and faster payoff live up to these costs if you refinance to a shorter term. After all, why bother with all the fuss and cost if you’re not going to benefit from it?
When Refinancing to Short Term is Suitable
So you know about the pros and cons. It’s time to see whether refinancing your home loan in Sydney to a shorter loan term is the right move. Here are some scenarios where it could be a smart decision:
1. You Have a Steady, High Income
Do you have a stable job with good income? Then switching to a shorter loan term won’t be a problem for you. You can comfortably afford higher monthly payments. And you can still meet other financial goals like saving for retirement or making investments.
2. You Want to Save on Interest
It could be that your goal is to save as much money as possible on interest payments. Then moving to a shorter loan term could make sense. You will have a lower interest rate and a quicker payoff. This will result in large savings over time.
3. Retirement is on the Horizon
You’re already anticipating retirement. But you still have some years left on mortgage payments? Sounds like a bummer. You can switch to a shorter term and pay it off faster. Doing so will give you more financial security. It will also ease up on the burden of monthly bills.
Need more tips on timing your refinance? Check out our blog post “When is the Best Time to Refinance Your Sydney Home Loan?”
When Refinancing is Not Ideal
It’s safe to say that switching to a shorter loan term might not be good for everyone. And here are some examples of those cases.
1. You’re on a Tight Budget
Let’s say your current budget is already stretched thin. Refinancing to a shorter term will only add unnecessary financial pressure. You will be making higher monthly payments with a shorter term. And that will make it even more difficult to cover other necessary expenses. Ultimately leaving you vulnerable to financial emergencies.
2. You Have Other Financial Priorities
Concentrating on getting rid of a high-interest debt? Saving for retirement? Or are you saving for a rainy day? Then spending money on those things instead of speeding up your home loan term might be more important. Remember that you should be integrating your mortgage payments with your bigger financial objectives. Not the other way around.
3. You Plan to Sell Your Home Soon
Thinking about moving soon? Then you might be thinking of selling your home in a bit. That means refinancing down to a shorter term won’t cut it. This is because any savings you will potentially make from the interest won’t be as big if you’ll just be staying for a few more years.
AFMS Group: Helping You Make the Right Choice
Refinancing to a shorter loan term is a big decision and you need to consider that carefully. That is why our team of expert mortgages at AFMS Group is here to help. We inform you of the pros and cons and let you weigh your options based on your financial situation. So are you looking to save on interest? Do you want to finish paying your mortgage quickly? Or do you want to explore other refinancing options? We can do help you do just that. Call us today. Let’s talk about what we can do for your home loan in Sydney.