There is no precise formula to calculate when exactly you should refinance your home. It will always depend on a number of variables and your personal circumstances.

The home loan market never stands still. Lenders frequently play around with their interest rates, change their loan terms, add new features, or include extras to entice new customers. Most importantly, your personal and financial circumstances need to align with the market conditions. 

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?

Lending institutions will have their own eligibility requirements, so it’s important to check the specific terms and conditions listed by your lender of choice before applying. However, below is a list of general lending criteria that you need to meet:

  • You are over the age of 18
  • You are an Australian citizen or permanent resident
  • You should have more than 20% equity in your home (industry standard and will help you avoid Lenders Mortgage Insurance)
  • Have a solid credit history and a good track record with mortgage repayments on your current loan

Why refinance your home loan?

Consolidate your debts

Refinancing can also help you consolidate multiple debts (including your credit card, car loans or personal loans) into one refinanced mortgage.

Not only would refinancing reduce your overall debt portfolio into one simple 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 actually save you money in the long run.

Low interest rates

Opportunities to reduce interest rates are the most common reason why people seek to refinance their home loans.

Interest rates are by their very nature, volatile. They fluctuate at the drop of a hat and are dictated by the cash rate provided by the Reserve Bank of Australia (RBA). That’s why when the cash rate drops, the interest charged on variable home loans should also come down and the converse is also true.

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 potentially save you thousands. It’s important to leverage low rates when they are in place. So if your lender isn’t willing to provide you with a competitive interest rate based on current market conditions, you should be looking at refinancing options. 

Financial situation has changed

For most home buyers, your financial position won’t stay the same throughout the entirety of your home loan.

Maybe you’ve started a new job that’s earning you significantly more than you did before and you’d like to look at settling your mortgage earlier. Then you could refinance to increase your monthly repayments or switch to a flexible fixed-rate mortgage that allows you to make extra repayments. Paying off the home loan sooner means you’ll spend less on interest repayments and save on your home loan overall.

There are some situations where 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 find out more about why you should or shouldn’t be making extra repayments with our handy extra repayments calculator and guide.

Another reason why you may want to refinance your home loan may be because you have been given a bonus or recently obtained a large lump sum of cash. If you have recently found yourself flush with cash, then you may look to “cash in” to refinance and reduce your overall mortgage balance.

A cash-in refinance is great for when you’re behind on your mortgage repayments or keep your mortgage 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 perhaps they aren’t offering the repayment systems you need such as offset accounts or redraw facilities.

Whatever the reason, if you are unhappy with the customer service provided by your current credit provider, it’s never a bad idea to go shopping around. It’s important to find the right lender that provides the necessary support for your home loan needs.

How soon can you refinance a home loan?

Whilst there aren’t any time-specific restrictions on refinancing, it can be counterintuitive and costly to refinance within 12 months of signing up for your current home loan. This is because most lenders have early exit fees which will most likely offset any potential savings from refinancing your home loan.

How soon you should refinance also depends on the type of home loan you currently have. Breaking a fixed-rate home loan, especially early in your fixed-rate period means you will incur significant break fees in addition to other closing costs. 

When to refinance a home loan

The timing of when you should refinance will depend heavily on the current home loan market, whether you can afford the discharge fees and why you are looking to refinance in the first place.

With that being said, there are some highly beneficial scenarios where you may want to start thinking about refinancing your home loan.

Drop in interest rates

When the RBA implements a significant cash rate drop, you may find that industry-wide loan rates are beginning to drop and your current lender no longer provides the competitive rates that it once did. When rates begin to drop, make sure you do your research and scan the market for the best comparison rates on offer.

A low-rate market may be the best time to refinance to a fixed-rate home loan so that you can lock in the rates to your advantage. Fixing your rate will ensure that you can leverage the lower interest rate with certainty for years to come. However, it is worth noting that fixed loans are not as flexible with repayment strategies and if you are anticipating making extra repayments, then it may be best to opt for a variable loan.

If you are looking to refinance due to low rates, be sure to calculate any potential savings so that they outweigh the break costs involved with leaving your current lender.  

The end of a fixed loan period

Most fixed loans will convert into a standard variable rate at the end of your 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 claim that the end of a fixed loan term is the best time to assess your refinancing options.

If fixed rates have continued to remain low or have gotten lower, it makes sense to consider another fixed-rate home loan. However, if your financial circumstances have changed for the better and your preference is to pay off your loan sooner, then signing up for a variable loan that allows for more additional repayments may be better suited for your needs

If you’re coming out of your fixed period, there may be a slew of different opportunities to save money. To find out which option is best for your personal objectives, talk with one of our home loan specialists today. 

LVR is less than 80%

If your LVR ratio is greater than or equal to 80% (loan amount is less than 80% of the property value), most lenders will offer you much better rates.

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. In fact, 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.

If you signed onto a home loan with less than a 20% deposit and have now acquired equity of 20% or more, you may have the opportunity to drastically improve the terms of your home loan. 

Major change of financial circumstance due to personal life

Sometimes, major changes to your personal circumstances may impede or improve your ability to make repayments or may 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 cash from a separation or death of a relative, then you may be looking to refinance for the purposes of making extra repayments or looking for a cash-in refinance.

On the other hand, if you are in dire need of cash, then you may want to opt for a cash-out refinance so that you can withdraw the equity you currently have in your home. Though this may not be the best idea to deal with financial distress, it is a refinancing option that can help you to 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’re planning on refinancing whilst holding less than 20% equity in your home, you will most 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 even if you paid it initially, your new lender would most likely request it again.

This just goes to show that whether or not refinancing makes sense depends greatly on how much equity you have. 

High refinancing fees

The break costs associated with refinancing will differ greatly among lending institutions. Sometimes, the exit fees involved with leaving your current loan may accumulate to be greater than the money you can save by refinancing.

As mentioned above, leaving a fixed rate home loan during the fixed period can result in exorbitant break fees that are not worth the hassle. However, depending on the terms and conditions of your current loan, exiting a variable rate home loan may end up costing just as much. Even without early exit fees, variable loans may still include discharge fees, as well as potential application fees and settlement fees.

Fixed loan term not completed 

This is the most widely mentioned reason why someone should not refinance.

When you sign a fixed-rate loan agreement you are always running the risk of rates becoming lower and fixed periods are put in place to ensure that the lender minimises the risk of you leaving for better rates.

If you opt to leave for a new loan during this fixed term, the lender has the right to charge you early exit fees which generally become more expensive the further rates have dropped since you signed up for the loan. That means that break costs will almost always outweigh any potential savings since they essentially scale according to how much lower the current rates are compared to your current rate.

That’s why it’s best to wait until your fixed term ends before considering refinancing options. 

What to consider before refinancing

It’s absolutely vital that you consider these factors before you make any decisions to refinance your current home loan. The more time you take to understand your own personal situation, the better you’ll understand your own 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.
  • Fixed period break costs – If you are on a fixed-rate loan you’ll need to pay your current lender a compensation fee for leaving early. The longer the time left on the fixed period and the greater the difference in rates, the higher the cost.
  • Application fee – Your new lender may charge an application fee to cover the administration costs of setting up your new loan.
  • Settlement fee – Paid to your new lender to cover the costs for paying out your current lender and switching your loan.
  • LMI – Lenders mortgage insurance may be requested by your new lender if your LVR is over 80% when you refinance.
  • Property valuation fee – Your new lender will need to have your property valued to determine the current market value and compare it to the existing valuation listed on your current loan.
  • Mortgage registration fee – A dutiable fee paid to the state government for registering your new home loan. Since a mortgage secures the loan against the property itself, it must be registered for debt record-keeping purposes.
  • Mortgage discharge fee – A further dutiable fee paid to the state government for switching home loans.
  • Title search fee – A fee that is paid to the new lender so they can check that the property is legally registered under your name. 

Current financial situation

It’s important to revise your current financial situation before submitting a refinancing application. Ensure that you have the funds on hand to pay any fees and costs associated with switching home loans. 

Furthermore, you should 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. It’s imperative that you consider any changes to your financial situation before submitting an application. 

How it will affect your credit rating

A mortgage 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 and depending on the outcome of the application, it may affect your rating in a negative way. Making multiple refinancing enquiries in a short duration of time will also have a negative effect on your score because lenders may view this as a sign of financial desperation. 

Reasons for refinancing

Remember that you should have your reasons for refinancing nailed down before proceeding.

Is it for the purposes of lowering your interest repayment, or to pay the loan off sooner? Maybe it’s a cash-out refinance to fund major renovations that will increase your property value or to buy an investment property.

Think about why you’re refinancing in the first place. Being confident and certain in your motives can help you decide which loan product is right for you and when the timing is right for you. In some cases, you may even find that there are better alternatives to refinancing for your particular situation.  

Alternatives to refinancing

There are plenty of alternatives to refinancing depending on what your goal is and they may be worth considering before you make the decision 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 a period of time. This will still allow you to take advantage of the market situation and would work out cheaper than switching lenders since you aren’t having to pay out LMI.

Another probable scenario is that you may be looking to refinance so you can make additional repayments because you’ve just been promoted. However, you aren’t looking to sell your current property until much later in your life. In which case, going to the effort of making additional payments and paying off your mortgage sooner may not be worth the effort. Instead, you may want to put the extra income into a long-term investment account or portfolio for the retirement fund. If the monetary benefits from paying off your mortgage earlier cannot be realised until you sell the home, investing that money may be a wiser alternative.

If you’re curious about how much you could potentially save by refinancing, or you have any concerns about the refinancing process you can call one of our home loan experts and they can walk you through all the options we have available.  

Otherwise, if you are still weighing up 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 is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration 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.