Changing your loan term when you refinance your home loan can reshape your financial position for the next decade or more.
Most homeowners in Lakelands focus on interest rates when they refinance, but the loan term you choose matters just as much. Extending your loan from 25 years back to 30 years might drop your monthly repayment by several hundred dollars, but it can also add tens of thousands in interest over the life of the loan. Shortening your term does the opposite, increasing your regular commitment while potentially saving you years of repayments and substantial interest costs.
How Loan Term Changes Affect Your Repayments
Your loan term directly controls your minimum monthly repayment and the total interest you pay. A shorter term means higher regular repayments but lower overall interest. A longer term spreads the debt across more years, reducing the immediate repayment obligation but increasing the total cost.
Consider someone in Lakelands who has been paying down their mortgage for seven years and now has 23 years remaining. They owe around $420,000 and their current lender is moving them from a fixed rate to a variable rate that no longer suits their circumstances. If they refinance to a new 30-year loan, their repayments drop noticeably, but they reset the clock. Instead of finishing the mortgage in 23 years, they are now committed for another 30. That extra seven years of repayments can easily cost an additional $80,000 to $100,000 in interest, depending on rates.
If the same borrower refinances but keeps the remaining 23-year term, their repayment stays roughly the same or may increase slightly depending on the new rate. However, they stay on course to finish the loan when originally planned. If they can afford to shorten the term further to 20 years, the repayment rises again, but they finish the loan three years earlier and save a substantial amount in interest.
Why People Extend Loan Terms When Refinancing
Borrowers often extend their loan term to reduce monthly repayments and improve cashflow. This can make sense if your income has dropped, your expenses have increased, or you are managing debt consolidation as part of the refinance.
In our experience, families in growing areas like Lakelands sometimes extend their loan term to free up weekly cashflow for childcare, school fees, or other ongoing costs. The lower repayment provides breathing room in the household budget. Others extend the term because they plan to make additional repayments when they can, using the lower minimum as a safety net rather than a permanent arrangement.
Extending your term is not inherently a mistake, but it should be a conscious decision rather than a default option. Some lenders automatically offer a new 30-year term during refinancing unless you specify otherwise. If you do not ask to maintain your remaining term, you may inadvertently add years to your mortgage without realising the long-term cost.
Shortening Your Loan Term to Save on Interest
Reducing your loan term when you refinance can cut years off your mortgage and reduce the total interest you pay. This works when your income has improved, your expenses have decreased, or you have paid down enough of the loan that a shorter term is now affordable.
As an example, a Lakelands couple who bought their home ten years ago may have built up enough equity and increased their household income to the point where they can comfortably handle a higher repayment. If they refinance their remaining loan balance over 15 years instead of the 20 years left on their current loan, they finish the mortgage five years earlier. The higher repayment is manageable because they have had pay rises and their childcare costs have reduced as their children started school.
This approach works well when your financial position has strengthened and you want to prioritise becoming debt-free sooner. Shortening the term is also a way to build equity more quickly, which can be useful if you are planning to access equity for an investment property or another purchase down the line. A loan health check can help you see whether a shorter term fits your current budget and long-term goals.
Keeping Your Existing Loan Term When You Refinance
Maintaining your current remaining loan term when you refinance keeps you on the same trajectory toward paying off your mortgage. If you have already been paying down your loan for several years, this approach ensures you do not lose that progress.
Many borrowers do not realise that refinancing does not require resetting to a new 30-year term. You can specify the remaining term from your current loan, or even a shorter period if that suits your circumstances. Lenders will assess your application based on the term you nominate, and as long as the repayments are affordable relative to your income, most will accommodate the request.
This is particularly relevant for Lakelands residents who are coming off a fixed rate period and looking to switch lenders or products. If your fixed rate is ending and you have 18 years left on your mortgage, refinancing to another 18-year loan keeps your repayment structure intact while allowing you to access a lower rate or different loan features.
How Loan Features Interact with Term Changes
Your loan term affects how useful certain loan features are. An offset account or redraw facility becomes more powerful on a shorter loan term because each dollar you park in the account or put toward the loan reduces a higher proportion of your remaining balance.
If you extend your loan term to 30 years but plan to make extra repayments, make sure the loan allows unlimited additional repayments without penalty and offers either redraw or offset. Some lenders restrict how much you can redraw or charge fees for accessing those funds. Others do not offer offset accounts on certain loan types. These restrictions matter more when your loan term is longer, because you may need flexibility over a more extended period.
Conversely, if you shorten your loan term, your minimum repayment is higher, which means you may have less surplus income to put into an offset account. The loan still benefits from a shorter term, but the offset may provide less benefit than it would on a longer loan with lower minimum repayments and more surplus cashflow.
When It Makes Sense to Extend, Shorten, or Keep the Same Term
The right loan term depends on your current financial position and where you expect to be in the next five to ten years. Extending your term makes sense when you need to reduce your minimum repayment to manage cashflow, consolidate other debts, or create a buffer while your income is uncertain. Shortening your term works when your income has increased, your expenses have dropped, or you want to prioritise paying off the mortgage sooner.
Keeping your existing remaining term is often the middle ground. It maintains your current repayment level and keeps you on course to finish the loan as originally planned, while still allowing you to access a lower rate or different loan structure through refinancing.
Your decision should also consider your broader financial goals. If you are planning to buy an investment property in the next few years, extending your loan term on your current home might improve your borrowing capacity by reducing your committed monthly expenses. If you are focused on becoming debt-free before retirement, shortening your term accelerates that timeline. A conversation with a mortgage broker can help you model different scenarios and see how each option affects your repayments, interest costs, and overall financial position.
Call one of our team or book an appointment at a time that works for you to review your refinancing options and work out the loan term that fits your circumstances in Lakelands.
Frequently Asked Questions
Can I keep the same loan term when I refinance my home loan?
Yes, you can maintain your current remaining loan term when you refinance. You need to specify this to your lender or broker, as some lenders default to a new 30-year term unless you request otherwise.
What happens if I extend my loan term when refinancing?
Extending your loan term reduces your minimum monthly repayment, which can improve cashflow. However, it also increases the total interest you pay over the life of the loan and delays the date you finish paying off your mortgage.
How does shortening my loan term affect my repayments?
Shortening your loan term increases your minimum repayment but reduces the total interest you pay and allows you to finish the loan sooner. This works well if your income has increased or your expenses have dropped.
Should I change my loan term when my fixed rate period ends?
It depends on your financial situation. If your income and expenses are stable, keeping your remaining term maintains your current trajectory. If your circumstances have changed, adjusting the term might suit your new position.
Does changing my loan term affect my ability to make extra repayments?
Changing your term does not prevent you from making extra repayments, but it affects your minimum obligation. A longer term gives you a lower minimum and more flexibility, while a shorter term commits you to higher regular repayments.
