Most homeowners consider refinancing their home loan at some point. Refinancing involves moving from your current loan or lender to a new one. And it might not be a bad idea, depending on your situation. For example, you might have:
- Changed jobs
- Switched up your finances
- A big purchase coming up
- Other property investments planned
- Or some debt consolidation to do
Or maybe you’ve heard from your neighbours, friends, or relatives that they’ve got a better deal on their loan.
Either way, taking a good look at your home loan and comparing your options every now and then is a good idea. It’s something you should revisit around every 3 years, or whenever your circumstances change.
If you’re savvy, you could save thousands per year and pay off your loan much more quickly simply by refinancing. The Australian loan market is competitive these days, and you can often find some great deals. And it’s possible that your current lender isn’t offering the best rates, flexibility, or service like they were when you signed up. Because it’s not all about the money, either. By refinancing, you might end up with better service and terms that are better suited to your situation.
But before you call the bank or fill out any paperwork, it’s a good idea to take a step back. Whether refinancing is a good move or not will depend on your situation, your goals, and the terms of your loan. A shiny new lender might have an attractive offer, but refinancing might not necessarily be the smart move.
In this article, we’ll explain some of these factors and help you understand your options. That way, you can make the best choice about whether or not to refinance your loan.
First thing’s first… let’s talk about rates. At first glance, you can easily compare rates between banks and lenders just by checking their websites. In fact, seeing a lower rate with another lender is probably why you’re thinking about refinancing in the first place. A lower rate means smaller monthly repayments and even a small difference can really impact how much interest you pay. But when you’re comparing lenders, it’s important to consider all the other factors, because lower rates won’t always save you money, especially if there are other fees involved in switching.
Loan terms and conditions
Before you switch loan providers, you need to look at the fine print. What are the penalties for prepaying on your current home loan? And what terms and conditions apply if you switch to your new provider? Looking at the details can help you compare “apples with apples” so you know exactly what you stand to gain/lose from your switch.
Advice from your trusted broker
Before you do anything, it’s worth talking to your mortgage broker about refinancing. Whether or not you choose to move to a different lender, you should stay with the same broker long-term (if you’re happy with their service, of course). This makes sense for two reasons. Firstly, your mortgage broker offers you impartial and independent credit advice – they’ll know your situation and whether refinancing is likely to be a good move or not. And secondly, because your mortgage broker has access to all the latest products and offers from a broad range of lenders (in our case, we can access 30+ lenders in our lending panel). This means they can find you the best offer for refinancing, make the process smooth for you, and help you stay ahead of the banks.
Your financial situation
If your financial situation has changed since you signed up with your current provider, or if you’re planning to make a significant change, it could be a good time to refinance. Use this opportunity to switch a loan with terms and payments to suit your situation. Some examples of financial changes might be a big purchase (like an investment property) or setting aside funds for your children’s education.
Your other debts
Do you have other debts (like credit card debts) that charge interest at a higher rate than your home loan? You might use refinancing to consolidate your debt, pay off your credit card, and roll it into the one home loan. This will ensure you’re paying a lower interest rate. You might also find it a lot easier to track (and reduce) debt when it’s all in the one place. So, before you refinance, take stock of your other loans and debts and see if you can incorporate them into your strategy.
Costs of switching
Most people refinance to save money, but before you can be certain you’ll save anything with a new lender, you’ll need to take into account fees. Most of the time, you’ll need to pay a few different exit/setup fees any time you switch lenders, which means you won’t really “save” any money for months (or even years) after. For example, if it costs you $900 in fees to switch lenders, and your new lender saves you $90/month in interest, it’ll take you 10 months to break even before you start saving money on your loan. Some fees include stamp duty, valuation, entry/exit fees, your application fee, and prepayment penalties. All these costs can really add up and wipe out your potential savings, especially if the new loan isn’t that much better than your current one. So do the maths and check whether it’s really worth it before you refinance.
Your credit history
If you’ve got good credit history, and especially if it’s improved since you applied for your current loan, you might be able to negotiate a better deal. But if your credit history has dropped recently (maybe you’ve got some outstanding debts) you might find yourself worse off. So, if you’ve paid some bills late or have significant credit card debt, you might be best off staying with your current lender until your credit situation improves.
Your employment situation
Similar to the credit history issue… if you’re in a lower paying or less stable job than when you got your current loan, you might find it harder to get a good offer or rate with a different lender. This is because banks want low risk applicants. And if you’re a higher risk, they’ll need to increase your interest rate to cover themselves. So, to put yourself in the best position for a good offer next time you refinance, try to pay off debts, avoid credit cards you don’t need, and get a better paying, more stable job.
If you’re locked into your current loan at a fixed rate (say, 3 years), it might be a smart move to stick it out until the end of this period, otherwise, you’ll usually need to pay a “get out fee”. But if you’re ready to refinance, now might be a good time to consider locking in a fixed rate with your new lender. That way, you’ll know what your repayments will be for the next few years.
Your plans for the property
It’s also important to think about the property, how long you plan to live there, how close you are to paying it off, and whether you might like to renovate at some point. For example, if you’re planning to move house soon or if you’re almost done paying off your loan, refinancing now wouldn’t be worth the time/effort/cost. But if you’d like to renovate your home or you’ve got years left paying it off, you might choose to refinance and use the equity in your home to cover upgrades, like a new kitchen, bathroom, flooring, or even an extension. Of course, this will mean taking out a larger loan and increasing the time it’ll take you to pay off the loan, so you’ll need to weigh up your options here.
Of course, it’s always a good idea to think ahead about how refinancing your property will affect your tax, especially if it’s an investment property. So make sure you talk to your accountant and ensure you’re making the most of any tax deductions from your property. They’ll know how refinancing will affect your tax and will help you stay in line with any rules set by the Australian Taxation Office (ATO).
Don’t just refinance for the sake of refinancing, or because your neighbour said to, or because your uncle’s co-worker’s grandma did it and saves $20/week. Think carefully about your reasons, whether it’s:
- Consolidating your debt
- Dropping your rate
- Paying off your mortgage sooner
- Finding a better service
- Or something else
If you’re not sure, you could start by taking a look at your options and see what’s out there. You might find there are more choices (and more competitive rates) than when you originally took out the loan. And if you don’t, then you can happily stay where you are, and review your situation again in a few more years.
So, should you refinance?
If you’ve looked at all these factors, it’ll hopefully be clearer to you whether it’s worth refinancing your home at the moment (or not). You might even talk to your current provider and let them know you’re thinking about moving away. If you’re lucky, they’ll offer to negotiate with you to try and keep your business… and you’ll save on your repayments without going through the hassle (and fees) involved in refinancing. Whatever you choose, it’s a good idea to talk to a professional (like your mortgage broker) to see what options are out there. If you need a trusted mortgage broker or financial planner to look at your situation and see if you can get a better deal through refinancing, talk to us. Contact us or head to our online home loan comparison resource, Rateseeker to see if refinancing is worthwhile for you.