Finance Advice

JUNE 24, 2021

Should you refinance your home loan

realestateview.com.au

Just like with your home itself, getting a home loan means you’re signing up for a long-term commitment where you and the loan are staring down a long-term partnership, bound to each other through thick and thin.

But that doesn’t mean you’re stuck in the relationship until the very last cent is paid off on your home loan.

Wondering whether you should stick by your current home loan, or consider refinancing and shop around for a better deal? Keep reading for the factors you need to consider before making any decision.

Should you refinance your home loan?

When was the last time you really looked at your home loan? For many people, it very likely may have been back when they signed the dotted line. But over time, interest rates would have changed, and your circumstances most likely have changed too.

One of the most common reasons people look to refinance their home loan is because interest rates have gone down, but you may also be looking for different loan features, like flexible payment options or a redraw facility. If you compare home loans and find that there is a better offer on the market than the one you have, refinancing your home loan could be your way to jump ship and make the most of the better offer.

A new home loan could mean making the most of lower interest rates and better features. It may also shorten your loan term and reduce repayments on your loan, so you can afford to make extra mortgage repayments and own your home sooner. But, just as with anything, there are many factors to consider so you actually end up better off.

What does refinancing your home loan involve?

In a nutshell, refinancing your home loan means paying out your existing home loan by taking out a new one. You can refinance by moving to a new lender, or switching to a different product with your existing lender.

If you choose to refinance, you have two options. One is to go the DIY path and do your own research and ask around to see where you can get the best deal. Once you’ve chosen your preferred lender, you just need to reach out to them and they will look after the process.

The other option is to use a mortgage broker. They are experts in the field and can easily compare a range of different lenders, so you can find the best loan for you. This is also often a free service for the borrower, and instead, they get paid by the lender that you choose. Just keep in mind that not all brokers necessarily take into consideration all lenders across Australia, so you may be missing out on a great deal, such as from a smaller credit union or building society.

Why refinance?

There are a number of reasons why people choose to refinance their home loan.

Reason 1: More money in your pocket

If you lock in a lower interest rate, your mortgage repayments will also decrease, meaning more money in your pocket, which will likely be a welcome injection of funds into your monthly budget.

Reason 2: Pay your loan off sooner

If your repayments have decreased but you’re still happy to pay the same mortgage repayments each month, you will pay off your home loan sooner and potentially save thousands of dollars in interest in the long term.

Reason 3: Better features

How’s a new home loan with a side of bonus frequent flyer points, a cashback offer, flexible payments options, or offset accounts?

By refinancing your loan, you may be able to make the most of features that your old home loan didn’t have, which make payments, contacting your lender, or controlling your finances even easier. Some lenders also offer sign-up bonuses for new borrowers, like cashbacks, points, or low or no fees.

Reason 4: You want to use your equity or consolidate debts

If you’ve built up a certain amount of equity in your home through your repayments, you may choose to refinance your home loan so you can redirect that equity into other investments, like property, shares, or even potentially to renovate your house.

Mortgages can also be used as a means to consolidate debts, such as a personal loan, car loan or credit card, so you can manage your money all in the one place.

When is the best time to refinance a home loan?

Reviewing your home loan from time to time is a good habit to get into to make sure it’s still the best option for you to achieve your financial goals. Not only will your own circumstances potentially change over time, but there may be features that home loans now have that you’d love to make the most of which didn’t exist back when you initially signed up.

If you have a variable rate home loan, aim to review it every 4-5 years. Do you have a fixed rate home loan? As you come to the end of the fixed rate period, it’s a great time to look around to see if you can get a better interest rate or more flexible features.

Does it cost money to refinance a home loan?

Now here’s the big thing to keep in mind. While switching may save you money, refinancing your home loan does actually cost money, so you need to make sure the amount you will save by switching far outweighs the costs to switch in the first place.

One of the big potential costs is if you are locked into a fixed rate loan. To get out of this, you will need to pay a break fee, and depending on how far you are through your fixed rate period combined with interest rates, this could be quite a hefty fee.

To figure out what it would cost you, contact your existing lender and ask them what the break fee figure would be if you left your loan today. From that, you’ll be able to see if any benefits of switching would be outweighed by the break fee figure.

Other fees that also may apply include an application fee, valuation fee, discharge fee, settlement fee, mortgage registration fee, or exit fees.

How many times can you refinance a home loan?

At the end of the day, there’s no legal limit on how many times you can refinance your home loan. But just keep in mind, each time you refinance, it may take a period of time to recoup the costs spent to change to your new home loan. So if you do it too often, you may end up worse off.

Also remember, every application for credit you make, such as applying for a new mortgage, will be marked against your personal credit file, and it could impact your credit score, which could make it more difficult to apply for a loan in the future.

Can you refinance a home loan with the same bank?

Yes, you can refinance with the same bank, and if you really like your existing lender and they’re offering a competitive product, why not? You will need to still pay the same cost associated with refinancing, although sometimes they may be less if you’re sticking with the same lender.

If you’re keen to stick with your existing lender but have seen better deals elsewhere, you can always chat to them and see if they’re able to match or even beat what the competitors are offering. In this case you may be able to stick with your existing mortgage, but enjoy a lower rate or added benefits, without any of the associated fees of refinancing.

So should you refinance your home loan?

Home loan refinancing could get you a lower interest rate, better loan features, and even sign up bonuses. So by switching you could save thousands of dollars in the long run, and even cut months off your loan.

But there are short-term costs to consider, as well as implications on applying for a new line of credit, which could affect your borrowing capacity in the future.

So before you make the decision to refinance your home loan, make sure you do your research, shop around, understand your finances, and if in doubt, speak to a financial professional.

 

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