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According to the ABS, the number of people refinancing their mortgage increased by over 63% in the year to May 2020. Quite often people think the only reason to refinance is to obtain a lower interest rate. However, this thinking is incorrect. Typically, you don’t need to refinance to obtain a lower interest rate (more about this below). As an experienced investor myself, I can tell you that there are far more important reasons to refinance your loans.

What is a refinance?

This might sound like a basic question. However, there are two types of refinances; internal and external. A refinance essentially involves entering into a new loan agreement. You can do that with your existing lender/bank, and this is called an internal refinance. Alternatively, you can switch to a new lender and this is called an external refinance. This distinction is important for my discussion below.

The first two reasons are the most important

Over the past 20 years, the primary motives for refinancing my personal mortgages were because of the first two reasons below. I’ll share why later in this blog.

Reason # 1: restructure your loans

Your loan structure can have a big impact on your cash flow and ability to invest. Restructuring your loan repayments, how loans are secured, loan terms and so on can provide substantial financial benefits. Here are a few examples:

As I explained in a blog last year, interest only terms typically run for 5 years only. Once that initial 5-year term expires, most (but not all) lenders allow borrowers to rollover onto an additional 5-year term. However, once you have used two 5-year terms, the only way to get another is to complete an external refinance, and switch to a new lender.

Almost all loan contracts are based on a 30-year loan term. If you elect to repay interest only, then your 30-year term will be split into two parts; one 5-year interest only term and the remaining 25-years on principal and interest (P&I) repayments. Therefore, if you use two 5-year interest terms (a second interest only term is typically only permitted for investment loans) and then switch to P&I repayments, your repayments will be based on the remaining term of 20-years. This will increase your minimum repayments. For example, repayments on a $800,000 loan over 20 years are approximately $4,440 per month. However, refinancing the loan to back to 30-years reduces the repayments to $3,380 per month thereby improving a borrower’s cash flow. You can achieve this by completing either an internal or external refinance.

It is important that loans are structured correctly to minimise your risk (minimise security), maximise control and ensure tax deductions are never compromised. To this end we often assist clients in restructuring their loans which could include unwinding cross-securitisation, consolidating loan accounts, splitting accounts, releasing property as security and so on.

If a client plans to sell a property, we will consider doing two things in advance. Firstly, where possible, we will release that property as security. This ensures that bank has no control over the sale funds. Secondly, we will consider whether to retain the existing l