When it comes to home loans, the terms ‘restructuring’ and ‘refinancing’ are often used interchangeably, but they actually describe two different processes. If you’ve ever wondered what the difference between refinancing and restructuring a mortgage is, this blog explains the differences between the two.
What is loan restructuring?
Mortgage or home loan restructuring is often confused with refinancing or refixing. However, restructuring is about more than just locking in a new interest rate. Restructuring is usually a combination of:
- Locking in a new interest rate
- Fixing part of your mortgage
- Setting new term limits
- Setting new loan repayment amounts
Restructuring is usually done to save you money on interest payments and pay off your mortgage faster.
When should I consider restructuring my home loan?
Most people restructure their home loans when their financial or life circumstances change. You might think about restructuring your mortgage if:
- You’re selling your home soon
- Your income is going to increase or decrease
- Your income will be affected by changing circumstances and you would like to increase or decrease payments
- Your home loan is coming off its fixed interest term
Home loan restructuring is a way to bring what you owe back into line with how much you can contribute. Before restructuring you should always consider the cost of breaking your current contract. If your home loan is on a fixed term rate, it could be beneficial to see out the term of your loan. This way you’ll be able to avoid any additional bank fees.
What is loan refinancing?
Refinancing is the process of switching your home loan to another bank. Refinancing isn’t just looking at new terms and conditions; it’s paying your mortgage back and taking out another with a new bank.
When should I consider refinancing my home loan?
There are lots of reasons you might want to think about refinancing including:
- Securing a lower interest rate
- Cash back offers or other incentives offered by a new bank
- Reviewing the structure of your loan
- Borrowing a larger amount of money
The best time to think about refinancing a mortgage is usually when your home loan is about to come off its fixed rate term, or if your income has significantly increased or decreased, or if you’re looking to borrow to buy a new home or investment property.
Most banks have a break fee which you will need to take into consideration when calculating the financial cost of switching banks.
What should I consider before refinancing?
Refinancing can be a complex process, so it’s best to consider the reasons behind why you want to switch your loan to a new bank. Sometimes restructuring can be an easier option and will leave you financially better off.
However, if you’re unhappy with your bank, want a better rate (and have done the math), or are looking to borrow more money, refinancing can be a good way to achieve your home loan goals. Before switching banks, you should:
Consider the cost
Refinancing isn’t free. Many banks charge early termination or repayment fees, there can be legal fees involved with looking over your contracts, your existing bank may state you have to return any cash back rewards, and you might have to pay new house valuation fees if applicable.
Make sure you do your due diligence on the overall cost of refinancing your mortgage. You may spend more money in fees than what you end up saving over time on your mortgage.
Do your research
If you’re considering refinancing, look beyond just the interest rates the banks are offering. Some banks will offer cash back incentives or waive application fees for switching which might be better financially than just switching for a lower rate. If you’re not sure how to go about doing this research, talk to us about refinancing. We’ll do all the research on your behalf and walk you through the best offers available.
Consult your existing bank
Before refinancing make sure you talk to your existing bank. Get clear about what will happen if you terminate your current contract and what the fees associated with early termination are.
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