When should you restructure your home loan?

Your property loan should never be a set-and-forget proposition.

Over time, your needs or circumstances might change and so there might be a type of home loan that suits you better than the one you have.

As a result, you might want to restructure your loan – that is, change some of its key features to suit you better.

Here are four reasons why you would restructure.

Breaking out of a fixed rate loan

If you’re in a fixed rate loan and interest rates have fallen, you might want to consider restructuring your loan to either a new fixed rate or to a floating rate to take advantage of the lower rates in the market.

But lenders may charge a break fee if you exit your fixed rate early, so before you do this you should discuss it with your mortgage advisor to see if there is a break fee and if the expense is worthwhile.

For instance, imagine you have a $500,000 home loan with a 4% interest rate that you have fixed for three years and you still have 18 months to go. If you moved to your lender’s current variable rate, say 2.35%, you would have to pay a break fee of $12,375.

It’s a substantial amount of money, but as UNO mortgage advisor Chris McNaughton explains, there are still reasons why you might do this. You can put the break fee onto your mortgage, so you won’t have to come up with the cash upfront, although it will add to your repayment time.

But it would also lower your monthly loan repayments, in this example from close to $2,400 to $1,937 for a saving of close to $500 a month. There are times when you might need this extra cash flow, particularly in the current coronavirus economic crisis, so it’s good that you have that option.

Consolidating credit card debt

If you have let your credit card debts climb to a substantial level, you may be better off adding the debt to your home loan and paying off the credit card bill (particularly if you close the credit card account and get a debit card instead!)

Credit card debt is typically charged between 19% to 24% if you only repay the minimum, so adding the debt to your mortgage with a much, much lower interest rate might make good sense. However because the debt is being repaid over a longer period, up to 30 years you may end up paying more total interest.

Importantly, though, this can also help you stay on top of your credit card debt and not damage your credit rating.

You can read more on debt consolidation here.

Buying an investment property

If an investment purchase is right for you, but you do not have the cash deposit saved you can consider a restructure to your existing mortgage.

If you already have a substantial amount of equity in your home – that is, you have paid off quite a bit of your home loan or its value has risen a lot – then you might be able to add to your loan to buy an investment property.

You might, for instance, have a $500,000 home which you live in and owe $150,000 on it. You could potentially buy a $500,000 investment property and consolidate the debt with your existing home loan. This would involve using both properties as security for the new loan, and also restructuring your existing loan so it is secured against both properties.

You would have a debt of $650,000 on $1 million worth of property, and you may not need to come up with any extra cash for the deposit on your investment property. Although there may be some extra costs to cover including stamp duty and conveyancing.

However, if you sell either property you will have to unwind both loans, so you should consider carefully if this option is right for you. It may mean having to sell both properties, particularly if property values fall. It could also mean that both properties would be at risk if you experience financial difficulties in the future.

Restructure, renegotiate or refinance

Often, when you restructure your home loan, it can also entail renegotiating with your existing lender or refinancing with a new lender, because you are also chasing a great deal. You can find more information in another UNO blog here. (LINK to Refinance or Restructure blog)

UNO’s Chris McNaughton says it’s always a good idea to go into these discussions with lenders armed with knowledge about what other lenders in the market are offering so you are in a strong position to negotiate.

Checking your loanScore is a great first step to knowing how good your rate is and providing you with the easy next steps towards renegotiating your current loan or refinancing with a new lender.

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