Proven tips to change your loan term when refinancing

Why your loan term matters when refinancing

Your loan term determines how long you'll be paying off your mortgage, and changing it when you refinance can have a bigger impact on your finances than the interest rate itself. A shorter term means higher repayments but less interest paid over time, while a longer term drops your monthly payment but increases the total cost.

When you refinance your home loan, you're not locked into the remaining years on your current mortgage. You can reset the clock entirely, shorten it to finish paying off your property sooner, or extend it to create breathing room in your budget. Each approach suits different situations, and picking the wrong one can cost you thousands or leave you stretched thin.

Shortening your loan term to save on interest

Reducing your loan term when you refinance means you'll pay off your property faster and hand over less interest to the lender. If you've been paying your mortgage for a few years and your income has improved, this can be one of the most effective ways to save money refinancing.

Consider someone who refinanced with 22 years left on their mortgage. They had been making extra repayments for a while and their income had gone up since they first bought the property. By refinancing to a 15-year term at a lower interest rate, they kept their monthly payment roughly the same but cleared the mortgage seven years earlier. The reduction in total interest paid was significant, and they owned their home outright well before retirement.

The catch is affordability. Shortening your term increases your minimum repayment, so if your budget is already tight or you have other financial commitments, this option might not suit you right now. It's also worth checking whether the lender you're considering offers the term length you want, as some cap their minimum terms.

Extending your loan term to reduce repayments

Stretching your loan term out when you refinance lowers your regular payment, which can be helpful if your circumstances have changed or you need more cash flow for other priorities. This approach is common when people are managing increased costs, planning to invest elsewhere, or simply want more flexibility in their budget.

In one scenario, a borrower with 18 years remaining on their mortgage refinanced to a 25-year term. Their household expenses had increased with two young kids, and they wanted to free up around $400 a month to cover childcare and school costs without dipping into savings. The longer term gave them the room they needed, and they could still make extra repayments when their budget allowed.

The downside is clear: you'll pay more interest over the life of the loan. Even if you refinance to a lower interest rate, extending the term can wipe out those savings if you're not careful. You also stay in debt longer, which might not align with your long-term goals. If you do extend your term, look for a loan with an offset account or redraw facility so you can chip away at the balance faster when you have extra funds.

Resetting your loan term to the original length

Some people refinance and reset their loan term back to 25 or 30 years, even if they've already been paying for several years. This approach keeps repayments manageable and works well if you're comfortable with a longer timeline or you're planning to make extra repayments down the track.

If you've been paying your mortgage for five years and refinance to a new 30-year term, you're effectively adding five years back onto your mortgage. Your repayment will drop compared to what it would have been if you stuck with the remaining term, but you'll pay more interest unless you actively pay extra or make lump sum contributions.

This option suits people who want flexibility and don't want to be locked into higher minimum repayments. It's particularly relevant for Perth borrowers who have experienced income changes or are juggling multiple financial priorities. Just make sure your new loan allows extra repayments without penalties, so you're not stuck with the longer term if your situation improves.

How loan term changes affect your refinance application

Lenders assess your ability to repay the loan based on the term you choose, and a shorter term means higher repayments, which can affect your borrowing capacity. If you're refinancing and trying to shorten your term, the lender will check whether your income comfortably covers the increased payment, along with your other expenses and debts.

If your loan amount is relatively small compared to your income, shortening the term usually won't cause any issues. But if you're borrowing close to your capacity, the higher repayment might push you outside the lender's criteria. In that case, you might need to adjust your term, consider a different lender, or wait until your financial position improves.

Extending your term can actually help your refinance application if you're struggling to meet serviceability requirements, because the lower repayment makes it easier to show you can afford the loan. This is one reason why people sometimes extend their term even if they don't strictly need to, and then make extra repayments voluntarily once the loan is approved.

Choosing the right term for your situation

The loan term you pick when you refinance should reflect where you are now and where you want to be in the next few years. If you're earning more than you were when you first bought your property, shortening your term can save you a significant amount on interest. If your household expenses have increased or you're planning to invest or renovate, extending your term gives you more flexibility.

There's no single right answer, and your decision should factor in your age, income stability, and other financial goals. Some people prefer the security of a lower repayment and the option to pay extra when they can, while others want the discipline and savings that come with a shorter term.

If you're not sure which direction to go, a home loan health check can help you compare scenarios and see how different terms affect your repayments and total interest. You can also model what happens if you extend your term but make regular extra repayments, which often gives you the flexibility of a longer term with the savings of a shorter one.

Call one of our team or book an appointment at a time that works for you. We'll walk through your current loan, your goals, and the options available so you can refinance with confidence.

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