Personal loan

Mortgage recalculation vs personal loan

Australians wishing to access finance to finance personal projects may have several options available to them. Australians who are also homeowners may have additional choices to consider, such as deciding between applying for a personal loan or using their mortgage withdrawal facility.

How does a personal loan work?

A personal loan can work similarly to a home loan, but on a smaller scale. You are always asking to borrow money from a bank or similar lender, to be repaid in installments plus interest over a pre-defined term.

However, personal loans tend to be for smaller amounts than home loans, often peaking between $60,000 and $100,000. They also often have shorter loan terms, measured in years, not decades.

Personal loans can have fixed or variable interest rates, much like home loans. However, since personal loans generally have shorter loan terms, repayments on a fixed rate personal loan will remain fixed for the duration and will not eventually revert to a variable rate like with a home loan.

Much like how a mortgage is secured by the value of the property, it is possible to secure a personal loan with the value of an asset. This can be the purchased product (like many auto loans) or another asset like equity in a property, money in a term deposit, or stocks. It is also possible to apply for an unsecured personal loan, although you are more likely to need excellent credit and pay a higher interest rate.

How does a redraw function work?

Many home loans offer borrowers the option of making additional repayments on top of their regular repayments. This can help reduce remaining mortgage principal, bringing the borrower closer to exiting their loan sooner, so they can be charged less interest over time.

Some mortgage lenders allow borrowers to redo any additional payments they have already made, by taking that money out of the loan and putting it back into their bank account. So, even if you put your savings aside to advance on your home loan, you will still have the possibility of accessing these funds if you need them.

Keep in mind that you can only recalculate additional repayments you have made – you cannot recalculate your regular monthly repayments. Also, some lenders limit the amount of money you can access with each drawdown, or the amount you can redraw per year. Others may charge a fee to access your redraw facility.

Is a personal loan better than a mortgage withdrawal?

Personal loans and home loan withdrawal facilities have advantages and disadvantages. The best choice for you may depend on your personal financial situation and goals, as well as what you plan to do with the money.

Applying for a personal loan can get you access to the money you need, and the regular repayment schedule means you can be sure it will be paid off over time, with less risk of the debt spiraling out of control . However, there is no guarantee that your personal loan application will be successful – if you have bad credit or your debt-to-equity ratio is already too high, a lender may not approve your application.

A withdrawal facility can provide options for how you use your money and does not involve applying for a whole new loan. But you will have to keep in mind that your budget will be limited by the additional repayments you have made previously. Plus, redesigning your additional repayments means they no longer reduce your mortgage principal, so you may not be able to pay off your property sooner and save as much money on mortgage fees. interest.

What other alternative options might be available?

Making additional payments on your mortgage could help build equity in your property. Although using your redraw feature may reduce your equity, you may instead have the option of putting it to work for you.

Homeowners may be able to use the equity in their property as collateral for a personal loan, which might have a lower interest rate than an unsecured personal loan. Alternatively, this extra equity could allow a homeowner to refinance their mortgage and borrow the extra money they want.

A borrower could also refinance to access a line of credit, which works similar to a credit card with a credit limit based on their usable equity in the property.

Keep in mind that these options could mean the mortgage takes longer to pay off, which could cost more in interest charges over time.