There is no precise formula for calculating when you should refinance your home. It will always depend on several variables and your circumstances.
The home loan market never stands still. Lenders frequently adjust their interest rates, change loan terms, add new features, or offer extras to entice new customers.
These variables can be a landmine to navigate and can have costly consequences.
That’s why we’ve put together a guide to help walk you through all the considerations you need to avoid expensive mistakes and get the most value from refinancing your home loan.
Am I eligible to refinance my home loan?
Financial institutions will have their eligibility requirements, so it is important to check the terms and conditions listed before applying. However, below is a list of general lending criteria that you will likely need to meet:
- You are over the age of 18.
- You are an Australian citizen or permanent resident.
- Have a solid credit history and a good track record with mortgage repayments on your current home loan.
Why should I refinance my home loan?
Lower your interest rates.
Opportunities to reduce the home loan interest rate are the most common reason people seek to refinance their home loans.
Interest rates are, by their very nature, volatile.
Your interest repayments will always make up a significant portion of the overall home loan cost, and that’s why even a slightly lower rate could save you thousands. If your lender isn’t willing to provide a competitive interest rate based on current market conditions, consider refinancing options.
My financial situation has changed.
Most home buyers’ financial position will change throughout their home loan.
You may have started a new job earning significantly more and are keen to repay your home loan faster. You could refinance to a lower rate and increase your regular repayment amount, or switch from monthly to fortnightly or even weekly repayments and make extra repayments. Paying off the home loan sooner means you’ll spend less on interest repayments and save on your home loan overall.
In some situations, extra repayments may not be ideal for your personal circumstances, particularly if you do not plan on staying at the property for the long term. You can learn more about why you should or shouldn’t be making extra repayments with our handy extra repayments calculator and guide.
Another reason you may want to refinance your home loan is that you have been given a bonus or recently obtained a large lump sum of cash. If you recently found yourself flush with cash, you may look to “cash in” to refinance and reduce your overall home loan balance.
A cash-in refinance is great when you’re behind on your home loan repayments or keep your home loan amount below certain limits for credit rating purposes.
Switching lenders
Lenders are a dime a dozen.
If you are unhappy with your current home loan provider, there are plenty of fish in the sea. Perhaps your existing lender isn’t willing to match competitive comparison rates provided by other lenders or doesn’t offer the flexibility and features you need, such as free offset accounts, a digital wallet or redraw facilities.
Whatever the reason, if you are unhappy with the customer service provided by your current home loan provider, it’s never a bad idea to shop around. It’s important to find the right lender that provides the necessary support for your home loan needs.
Consolidate your debts
Refinancing can also help you consolidate multiple debts (including credit card, car loan, or personal loan debt) into one refinanced home loan.
Not only would refinancing reduce your overall debt portfolio into one simplified monthly repayment (reducing the risk of forgetting payments and being slugged with a late fee), but all your debts would be charged at your home loan interest rate – which is usually much lower than rates you would pay on other types of debt.
However, it’s worth noting that debt consolidation refinancing could also turn a short-term debt like a personal loan into a much longer-term debt (i.e. your home loan). That’s why it’s best to run the calculations to fully understand whether consolidating debts into your home loan would save you money in the long run.
When to refinance a home loan
The timing of when you should refinance will depend heavily on your circumstances, how you are affected by rising cost-of-living pressures and why you are looking to refinance in the first place.
That said, there are some highly beneficial scenarios in which you may want to consider refinancing your home loan.
The end of a fixed loan period
Most fixed loans convert into a standard variable rate at the end of the fixed period, and these variable rates are often set up to be much higher than other rates on the market.
That’s why people often assess their refinance options at the end of a fixed loan term.
Talk with one of our home loan specialists today to find out options suitable for your personal objectives.
LVR is less than 80%
Most lenders will offer better rates if your LVR ratio is greater than or equal to 80% (the loan amount is less than 80% of the property value).
Due to the dramatic rise in property prices over the last decade, more and more people are opting to purchase a home with far less than the standard 20% deposit. Many lenders have begun to accept buyers with just a 5% deposit. However, the rates and terms provided on these high LVR loans tend to be highly unfavourable, and the borrower will have to take up LMI as a safety net for the lender.
Suppose you signed up for a home loan with less than a 20% deposit and have now acquired equity of 20% or more. In that case, you may have the opportunity to drastically improve the terms of your home loan.
A major change in financial circumstance due to personal life
Sometimes, major changes to your circumstances may impede or improve your ability to repay or result in the need for cash.
This may include events such as:
- Birth of children
- Marriage
- Loss of job
- Divorce
- Becoming a carer for a relative or friend
- Becoming a guardian for a relative
- Death of a close relative and inheritance
If you have inherited a large amount of money, you may be looking to refinance to make extra repayments or to obtain a cash-in refinance.
On the other hand, if you need money, you can opt for a cash-out refinance to withdraw the equity you currently have in your home. Though this may not be the best idea for dealing with financial distress, it is a refinancing option that can help you deal with an unexpected circumstance.
Before you make any major financial decisions during a time of hardship, make sure that you speak to a financial advisor for guidance and advice.
When not to refinance a home loan
There are situations where refinancing may not be the best course of action and may negatively impact your financial situation. Here are a handful of scenarios where you should steer clear of refinancing.
Low equity may equal LMI.
If you plan on refinancing whilst holding less than 20% equity in your home, you will likely have to pay LMI. This can be particularly costly if your equity is less than 10%, and more often than not, having to pay LMI will offset any potential financial benefit of refinancing in the first place.
LMI does not carry over from your existing loan, meaning that your new lender would most likely request it again even if you paid it initially.
What to consider before refinancing
Consider these factors before deciding to refinance your current home loan. The more time you take to understand your situation, the better you’ll be able to determine your needs and whether refinancing will strengthen your financial position.
Refinancing costs
Though costs will always depend on the type of loan you currently have, here is a list of potential costs that are associated with refinancing your home loan:
- Loan discharge fee – Always paid to your current lender to cover the administration costs of terminating your current loan.
- Application fee – Your new lender may charge an application fee to cover the administration costs of setting up your new loan.
- Settlement fee: This may be paid to your new lender to cover the costs of paying out your current lender and switching your loan.
- LMI—Your new lender may request lender mortgage insurance if your LVR is over 80% when you refinance.
- Property valuation fee—Your new lender will need to have your property valued to determine its current market value and compare it to the valuation listed on your current loan.
- Mortgage registration fee—A dutiable fee paid to the state government to register your new home loan. Since a mortgage secures the loan against the property, it must be registered for debt record-keeping purposes.
- Title search fee – A fee paid to the new lender so they can check that the property is legally registered under your name.
Current financial situation
Revise your current financial situation before submitting a refinancing application. It is helpful to compare your current financial circumstances to when you were last approved for your home loan. Some key questions that may impact the likelihood of approval include:
- Has your overall income increased or decreased?
- Have your expenses increased or decreased?
- Has your property value increased or decreased?
- Do you have more dependents than before?
- Has your credit rating improved or deteriorated?
Remember that you won’t be guaranteed refinance approval just because you were approved for your first home loan. You should consider any changes to your financial situation before applying.
How it will affect your credit rating
A home loan refinancing application is treated the same as any other application for a loan.
It will register as a formal credit enquiry in your credit history. Depending on the outcome of the application, it may negatively affect your rating. Making multiple refinancing enquiries in a short period of time will also negatively affect your score because lenders may view this as a sign of financial stress.
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Alternatives to refinancing
There are plenty of alternatives to refinancing, depending on your goal, and they may be worth considering before you decide to refinance.
First, nail down why you’re looking to refinance and debate the pros and cons of each option.
For instance, if your goal is to reduce interest repayments due to the low rates on offer and you haven’t got the LVR to go shopping around, you could call your lender to negotiate a lower interest rate or have your repayments fixed for some time. This will still allow you to take advantage of the market situation and could work out cheaper than switching lenders since you won’t have to pay out LMI.
If you’re curious about how much you could save by refinancing or have any concerns about the process, call one of our home loan experts. They can walk you through all the options we offer.
Otherwise, if you are still weighing whether refinancing is the right option for you, check out our extensive guide for more tips on whether you should refinance your home loan.
Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute financial advice, whether general or personal nor to imply any recommendation or opinion about a financial product. It does not consider your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.
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