Refinancing means taking out a new loan with more favourable terms and using it to pay off your current mortgage. This can be a way to save money on your monthly repayments, reduce your interest rate or shorten your loan term.
As interest rates rise across the world, refinancing your home has become a hot topic of conversation as repayments skyrocket and lenders raise rates on borrowers’ loans.
Knowing why and when to refinance your home loan is crucial to insure you don’t end up in a financial situation that doesn’t meet your goals.
This guide will walk you through the reasons you should refinance your loan and what to look out for when doing so.
So let’s dive into some of the reasons you should refinance your home loan:
Common reasons to refinance
To access a different loan type or better interest rates.
When you are on a variable-rate home loan, or your fixed rate ends and you get moved to the standard variable rate, you may be paying more than you have to! Refinancing is a great way to get a lower interest rate in order to make your loan repayments lower each month.
Change the terms of your loan from a variable to a fixed-rate home loan (or the other way round).
When your fixed term expires it is a great time to assess what you want to do for the life of your loan. While you can’t lock in a fixed interest rate for the life of the loan, you are able to shop around to find the best low rate for your needs. You may want the flexibility of a variable rate or the certainty of a fixed rate. You can use lenders’ repayment calculators to see how different loan types will impact your repayments.
Access other loan features like flexible repayments or an offset account.
When you refinance, your new lender may be able to offer the features and benefits that your current home loan doesn’t offer. These can be things like a redraw facility or offset account, that allows you to save up cash in the account to offset interest.
You may also gain the ability to make extra repayments if you are on a variable-rate loan.
Your new lender may offer cashback offers, the option to pay interest only on your loan or more flexibility for your needs.
Use the equity in your home for other purposes, such as buying an investment property or doing renovations.
When you own a home, your home appreciates in value over time in a good market landscape. As you build home equity, you may want to refinance your home to cash out some of that equity to use for other purposes. Many people refinance their homes to use the cash to invest in other assets or renovate their homes to add more value to the property. The cash that is unlocked can be used to purchase a new home.
Debt consolidation (like from your other credit card, personal loans, or car loans) into a single monthly repayment.
Much like above, you can cash out your equity to use this as a way to pay down and make consolidating debts easier. This is a great way to meet your financial goals and help minimise the cost of debts. When doing this, it is important to note that this will increase your loan amount and therefore your mortgage repayments will change. In saying that, you are able to wipe other debts and have all debts charged at your home loan rate, which typically has low-interest rates compared to a personal loan or credit card.
Watch out for fees and charges involved with refinancing
When you are refinancing, you should be sure to look at more than just the interest rate.
Here are some things to look out for:
- Establishment or application fees: An establishment fee in refinancing or when setting up a new loan is a charge assessed by a lender to pay for their service.
- Exit fees (settlement, termination, and discharge fees or break costs): There are many different types of fees a lender may charge when a borrower terminates a loan agreement before the scheduled maturity date. It's sometimes a percentage of the current loan balance.
- Valuation fees: This is the fee for the lender to conduct a valuation of the property so they know the value of the home and the equity you can unlock.
- Admin and service fees: These are usually fees you pay on an ongoing basis to the lender, some loans will have no fees, and others will be very high.
- Lenders Mortgage Insurance (LMI): LMI is a fee charged by lenders when you have a loan-to-value ratio (LVR) greater than 80%. That means if you refinance your property and don’t have that much equity in your property value. You may be subject to this fee.
- Comparison rate: This is the rate of interest plus fees, in comparison to another lender. This is crucial to understand as it will give you the overall cost of the loans you are considering.
Overall, when interest rates are rising and the cost of living is increasing, it is a great time to make sure your home loan is working for you and your family.
The Australian Financial Review reports that homeowners have moved $14b worth of home loans to a new lender in August 2022, a 20% jump on August 2021.
Using these tips and understanding your goals will help you speak to your lender or mortgage broker about what is right for you. Changing your loan can save you hundreds of dollars, so it is best to check it out as soon as you realise it is time to change. Home buyers can always check in with their current lender to understand lending criteria and loan structure to see if they can help minimise their home loan repayments without the need to look at another lender.
If you want to read more about what refinancing is and how to do it, check out our blog.