Understanding Loan Term Changes When You Refinance
When you're thinking about mortgage refinancing, one of the most significant decisions you'll face is whether to adjust your loan term. As a self-employed borrower, understanding how this works can help you make the right choice for your financial situation.
Your loan term is simply the length of time you have to repay your home loan. In Australia, standard terms range from 15 to 30 years, though some lenders offer different options. When you refinance your home loan, you're not stuck with your original loan term - you can extend it, shorten it, or keep it the same.
Why Loan Term Changes Matter for Self-Employed Borrowers
As someone who's self-employed, your income might fluctuate throughout the year. This makes your loan structure particularly important. The right loan term can help you manage cashflow during quieter months while still building equity in your property.
When you're considering a home loan health check, your loan term should be one of the key factors you review. It directly affects:
- Your monthly repayment amount
- The total interest you'll pay over the life of the loan
- How quickly you build equity
- Your financial flexibility
The Pros of Extending Your Loan Term
Extending your loan term when you refinance can offer several advantages, particularly if you're looking to improve cashflow.
Lower Monthly Repayments
By spreading your loan amount over a longer period, your monthly repayments decrease. For self-employed people with variable income, this can provide breathing room during slower business periods. If you're currently paying $3,000 monthly on a 20-year mortgage, extending to 30 years might reduce this to around $2,200, depending on your interest rate.
Increased Financial Flexibility
Lower repayments mean more money available for other priorities - whether that's reinvesting in your business, covering unexpected expenses, or building an emergency fund. Many self-employed borrowers find this flexibility valuable when managing irregular income patterns.
Access to Additional Features
When you refinance to lower rate products with extended terms, you might also access features like a refinance offset account or refinance redraw facility, which can help you save on interest while maintaining flexibility.
The Cons of Extending Your Loan Term
While lower repayments sound appealing, extending your loan term comes with trade-offs you need to consider.
Paying More Interest Overall
The longer you take to repay your loan, the more interest you'll pay. Even if you refinance interest rates are lower than your current rate, extending from 15 to 30 years could mean paying tens of thousands more in total interest over the loan's life.
Slower Equity Growth
With lower monthly repayments, less of each payment goes toward reducing your principal. This means you build equity more slowly, which could affect your ability to access equity for investment or other purposes down the track.
Longer Debt Commitment
Extending your loan term means you'll be in debt for longer. If you're already several years into your mortgage, resetting to a 30-year term could mean you're still making repayments well into retirement.
The Pros of Shortening Your Loan Term
Reducing your loan term when you refinance mortgage can be a powerful wealth-building strategy if your cashflow allows it.
Substantial Interest Savings
This is the big one. Shortening your loan term means you'll save thousands - potentially hundreds of thousands - in interest payments. If you can afford higher monthly repayments, this strategy can significantly reduce your loan costs.
Faster Debt Freedom
You'll own your home outright sooner, which can be particularly appealing if you're planning for retirement or want to reduce financial commitments as your business matures.
Quicker Equity Building
With more of each repayment going toward principal, you build equity faster. This can be valuable if you're planning to release equity to buy the next property or access equity through a cash out refinance for other investments.
The Cons of Shortening Your Loan Term
Before you rush to shorten your loan term, consider these potential drawbacks.
Higher Monthly Repayments
This is the obvious trade-off. Reducing your loan term increases your monthly repayments, sometimes substantially. For self-employed borrowers with variable income, this can create cashflow pressure during quieter months.
Reduced Financial Flexibility
With more of your income committed to mortgage repayments, you have less available for other opportunities or emergencies. This can be particularly challenging when you're running your own business and need capital for growth or to weather economic changes.
Potential Impact on Borrowing Capacity
Higher repayments affect your borrowing capacity if you need additional finance in the future. This could limit your options for business expansion or investment opportunities.
Finding the Right Balance
The decision to adjust your loan term during the refinance process isn't always black and white. Many self-employed borrowers find success with hybrid approaches:
Keep Your Term but Make Extra Repayments
You could maintain a longer loan term for flexibility but make additional repayments when cashflow allows. This gives you the security of lower minimum repayments while still reducing interest and building equity faster during profitable periods.
Use Offset Accounts
A refinance offset account lets you park surplus business income where it reduces your interest without committing to higher fixed repayments. This can provide the interest savings of a shorter term with the flexibility of a longer one.
Review Your Circumstances Regularly
Your ideal loan term today might not suit your situation in a few years. Regular loan reviews ensure your mortgage still aligns with your business and personal goals.
When to Consider Changing Your Loan Term
Certain situations make loan term adjustments particularly worth considering:
- Your fixed rate period ending presents a natural opportunity to restructure
- Your business income has increased substantially and you can afford higher repayments
- You're approaching retirement and want to accelerate debt reduction
- Cashflow has become challenging and you need to reduce repayment pressure
- You're planning to unlock equity for business expansion or property investment
Making Your Decision
When deciding whether to adjust your loan term during a home loan refinance, consider:
- Your current and projected cashflow patterns
- Your age and retirement timeline
- Your business growth plans
- Your risk tolerance for higher fixed commitments
- Your overall financial goals
As a self-employed borrower, your refinance application might require more documentation than traditional employees, but don't let this discourage you from exploring whether changing your loan term could improve your financial position.
The property valuation and loan amount considerations during refinancing mean you'll have a clear picture of where you stand. This knowledge, combined with professional guidance, helps you make informed decisions about your loan structure.
Whether you're looking to switch to variable, switch to fixed, or consolidate into mortgage products with different terms, understanding the pros and cons of loan term changes puts you in control of your financial future.
Call one of our team or book an appointment at a time that works for you. We'll help you assess whether adjusting your loan term makes sense for your unique situation as a self-employed borrower.
