If you’re considering how to finance your next big-ticket purchase, you will have different options available to you.
While credit cards and seller financing remain popular, you might get better value if you consider your loan options instead. However, even then, you may have several choices to consider.
In this blog, we look at how you might decide whether refinancing your home loan or taking out a personal loan is the best choice for you.
Option 1: Full home loan refinance
There are a couple of ways you might be able to take out a loan against your home.
The first is via a full refinancing of your home loan, which works like refinancing a personal loan. To refinance your home loan in full, you take out a new home loan, clear your current one, and then are left with the cash to spend on whatever you wish.
Why might you consider a full home loan refinance?
You may choose a full home loan refinance in several scenarios:
- You’re planning extensive renovations to your property which will increase its value, and you need a lump sum to complete the projects.
- You’re looking to consolidate other large debts into one payment, and potentially get a better deal.
- You’ve almost cleared your home loan but have many years of work ahead of you and can afford to make repayments while taking advantage of having a lump sum now.
Potential to borrow more significant amounts of money for whatever you need.
Refinancing your home loan could recommit you to years of paying interest and making repayments, vastly increasing what you pay for your home.
Potential for even higher levels of borrowing if the value of your home has increased.
Even with a lower interest rate, you could end up repaying more than if you were to take out a personal loan due to the length of home loans.
If your refinancing deal with your home loan provider relies on extra payments, you undo the other benefits of having made these. It will take you longer to clear your home loan.
Option 2: Equity release or partial home loan redraw
Instead of doing a full refinancing of your home loan, equity release, or a partial home loan redraw, might be a better solution.
Although you might not be able to access the same amount of cash, you could still borrow a sufficient amount. Some home loan providers do not limit the frequency of redraws. However, it is common for redraws only to be available from additional repayments that you’ve made.
You should be aware that lenders do typically have minimum and maximum redraw limits. Your lender may also charge a transaction fee for each redraw.
Why might you consider equity release, or a partial home loan redraw?
Equity release or a partial home loan redraw might be useful if:
- You wish to borrow a smaller amount of money, but enough to do something like take a vacation or undertake smaller scale home renovations.
- You wish to consolidate several smaller debts into one repayment.
- You’ve been making extra payments on your home loan, rather than saving your cash, to use a redraw facility when you need it.
As borrowing amounts will be smaller, a redraw will probably be cheaper, and you will clear it quicker than if you go for a full refinance.
Depending on redraw limits, you might not be able to redraw enough for things like a new car or to pay for a wedding.
Can be used to consolidate your other debts.
Fees to pay each time you wish to redraw.
Flexibility to redraw what you need, subject to your lender’s limits.
If your redraw is based on extra payments you’ve made, you “reset” your home loan back to its original terms.
Option 3: Personal loan
Instead of refinancing your home loan or going for a home loan redraw, you might consider taking out a personal loan.
The nature of home loan refinancing or a redraw means those types of borrowing are secured against your home. However, you can also look at a secured personal loan. Such a loan may enable you to borrow more money and get a better interest rate than if you were to take out an unsecured loan.
The advantages of a personal loan are that you might have more flexibility around how much you borrow. You may also be able to find personal loans tailored to the reason you’re looking to borrow.
Why might you consider a personal loan?
You might decide to choose a personal loan if:
- You’re looking at unsecured borrowing options instead of borrowing against your home.
- You’re comfortable with secured borrowing, but don’t wish to refinance or redraw on your home loan.
- You need to borrow a higher amount than you have available from a redraw, but don’t need a full refinancing of your home loan.
- You have a specific loan purpose and borrowing amount in mind, and wish to find a lender that specialises in that loan purpose.
You may have more flexibility around how much you can borrow, for what purpose, and the type of loan.
If you’re still repaying your home loan, a personal loan will be an added debt obligation.
A personal loan will typically have a shorter loan period than a home loan or redraw, meaning you will repay the debt quicker.
Interest rates may be higher than if you refinance or redraw your home loan.
Even with a higher interest rate, the shorter loan period means a personal loan can represent better value.
Should you refinance your home or get a personal loan?
Whether refinancing your home loan, looking for a redraw or applying for a personal loan, the best choice for you will depend on your circumstances.
To decide which choice is best for you, consider:
- The reason you’re looking to borrow.
- How much you need to borrow.
- Whether you’re happy to extend your home loan repayment period or would prefer a shorter repayment window.
If you decide a personal loan is the right choice for you, NOW Finance may be able to help.
If you’re seeking a personal loan, check your rate here to get your personalised rates on a NOW Finance personal loan, with no impact on your credit score.
Disclaimer: This article contains general comments and recommendations only. This article has been prepared without taking account of your objectives, financial situation or needs. Before taking any action you should consider the appropriateness of the comments made in the article, having regard to your objectives, financial situation and needs. If this article relates to the acquisition, or possible acquisition, of a particular credit product you should obtain and consider the relevant disclosure documents before applying for the product.