Refinancing basically means switching from one home loan product to another. Your new lender pays your debt to your existing lender, then you repay the loan to the new creditor. If the loan you are switching to has a lower interest rate, refinancing can mean lower monthly repayments. Other common reasons borrowers refinance include consolidating other debts into one loan, or using equity to purchase an additional property.
Refinancing isn’t always a silver bullet solution though, and there can be a right and wrong time to do so. Here’s what to know.
Read more: Your Mortgage guide to refinancing
When can you refinance your home loan?
Technically, there are no rules in Australia that prevent you from refinancing your home loan the very next day after settlement, although certain products might have conditions that prevent you from doing so. It probably wouldn’t be the best decision though, considering the various costs that come with refinancing. There are expenses like establishment fees, break costs and valuation fees which can all add up, so it’s pretty unlikely refinancing your home loan so quickly will end up being worth it, presuming you did your research when you took on the loan initially.
Buying a home or looking to refinance? The table below features home loans with some of the lowest interest rates on the market for owner occupiers.
| Lender | Home Loan | Interest Rate | Comparison Rate* | Monthly Repayment | Repayment type | Rate Type | Offset | Redraw | Ongoing Fees | Upfront Fees | Max LVR | Lump Sum Repayment | Additional Repayments | Split Loan Option | Tags | Features | Link | Compare | Promoted Product | Disclosure |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
6.04% p.a. | 6.08% p.a. | $3,011 | Principal & Interest | Variable | $0 | $530 | 90% | 4.6 STAR CUSTOMER RATINGS |
| Promoted | Disclosure | |||||||||
5.99% p.a. | 5.90% p.a. | $2,995 | Principal & Interest | Variable | $0 | $0 | 80% |
| Disclosure | |||||||||||
6.14% p.a. | 6.16% p.a. | $3,043 | Principal & Interest | Variable | $0 | $350 | 60% |
When to refinance a home loan
You’ve built up equity
One of the very first things you should consider when refinancing your mortgage is the equity you have already built up in your home. Equity is the difference between your property's value and the amount you still owe on your property. If you have an outstanding loan worth $300,000 and your property is worth $600,000, your equity is 50%.
The higher your equity, the lower your Loan to Value Ratio (LVR). Since lenders use LVR to measure how risky a borrower is, lower LVR loans often mean lower rates and more favourable conditions. Refinancing can be highly advantageous if you’re doing so from an improved equity position than your current loan, because you might now be able to access a wider range of products with more favourable rates.
Lenders Mortgage Insurance (LMI) should be another important consideration. Borrowers whose LVR exceeds 80% are usually charged LMI premiums to compensate the lender for the perceived extra risk. If you were charged LMI when you took the initial loan, it’s likely you’ll be charged again unless you’ve moved past 20% equity. LMI is not transferable between lenders, although it’s worth checking with your bank to see if any rebates are available.
Your fixed term is finishing
If you have locked in your loan over a fixed period, it would not be a good idea to refinance within the term. This is generally because most banks charge exit fees when you decide to switch to another lender while still being in a fixed period, which can be very significant. Once your fixed term expires, you will generally revert to your lenders basic variable rate, so if that isn’t up to scratch, that’s the time to refinance.
You’ve found a better rate
A slight increase in the interest rate can make a significant change in your monthly repayments. If you had $450,000 outstanding on a 20 year term home loan, refinancing from 6.50% p.a to 6.25% p.a changes your monthly repayments from $3,355.08 to $3,289.18, shaving more than $15,000 off your eventual total interest bill (taken from the Your Mortgage home loan repayments calculator)
If for example, your lender hikes your loan's interest rate by more than the corresponding rate hike from the Reserve Bank of Australia, it might be time to refinance your loan to another lender with a more competitive rate.
Be careful, however, when making decisions based purely on interest rates. Consider the costs of switching a loan before you go after a cheaper rate, as there are instances where the cost of refinancing outweighs the potential savings.
Our financial calculators can help you to crunch these numbers and figure out your best course of action.
You’ve found an enticing refinance offer
Some lenders have additional incentives to entice borrowers to make the switch over. Cashback offers are most common: in exchange for refinancing your loan, the lender might give you a few thousand dollars that can either go towards paying down the loan or straight into your pocket. However, once again these offers should be weighed against all the other costs of refinancing. A $2,000 cashback offer can’t compensate for a higher rate after all.
Read more: Home loan cashback offers
What to consider before you refinance
While refinancing can be a big cost saver, it generally doesn’t work out well to do so every few months, bouncing around different lenders. Refinancing is an important decision to make that should always be informed by your financial goals and personal circumstances.
The effort and time involved
As well as your money, refinancing can also take up arguably an even more important asset: your time. Remember when you first signed onto a home loan? Deciding to refinance a home loan is essentially going back to that beginning. You’ll need to go through another loan application process and there are no assurances that you will get approved easily.
Your credit score
It’s important to also keep in mind making a formal application for a credit product like a home loan is recorded on your credit report. Firing off too many refinance applications can hurt your credit score, particularly if you’re sending multiple applications to multiple lenders.
The costs
As we mentioned, refinancing usually involves costs. There might be loan establishment fees, exit fees, break costs or LMI premiums that apply, among other expenses. Check out our refinancing guide for a more detailed breakdown of the process.
The opportunity costs
When you’re crunching the numbers, another less tangible variable to consider is the opportunity cost of refinancing: what you could have done with that money otherwise. Imagine you find a new loan and you work out that refinancing will likely mean $1,050 worth of savings over the next two years. The cost of refinancing is $1,000, so you decide to pull the trigger since you’re up $50. However, that same $1,000 instead into a two year term deposit returning 5.00% p.a would net you $100.
Image by Bruce Mars via Unsplash
Collections: Refinance home loans
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