Should you refinance your mortgage during COVID-19?

Refinancing your mortgage could save you thousands in the long run. The combination of historic rate cuts and a slowing economy amidst COVID-19 presents a prime opportunity to secure a competitive home loan interest rate.

The home loan market is incredibly competitive, particularly following the historic rate cuts issued by the Reserve Bank of Australia (RBA) after COVID-19. Banks and lenders have slashed interest rates in a bid to help borrowers meet their financial obligations while trying to secure new clients amidst a tough economic climate.

If you currently have a mortgage, it’s a good idea to regularly revisit your options and see if you can lock down a better deal on your home loan. 

In this post, we take you through:

• What mortgage refinancing is
• The benefits of refinancing
• Why refinancing might make sense during COVID-19

What is mortgage refinancing?

Mortgage refinancing is the process of getting a new mortgage to replace your existing one. This allows you to secure a sharper deal on your home loan or have access to additional features such as an offset account, either with your existing lender or a new lender.

Why refinance your mortgage?

Refinancing your mortgage is a great opportunity to revisit your options and see if you’re still getting a competitive deal with your lender.

The average home loan term in Australia ranges from 10 years to 30 years. During this time, it’s inevitable that there are changes in the market. Interest rates will rise and fall, and lenders will offer additional features on home loan products to entice new borrowers, such as cash rebates or lower fees. 

If you stick your existing lender and home loan rate, you could be costing yourself thousands in the long run. 

There are plenty of benefits that come from refinancing your mortgage:

• Secure a lower interest rate on your home loan. This can either lower your monthly repayments or help you pay your loan off faster.
  
• Consolidate your debts. If you have multiple debts, such as credit card debt or personal debt, you might be paying separate interest rates on each one — which adds up significantly over time. Refinancing allows you to combine your high-interest debts into one lower-interest payment. This will not only help you manage your cash flow better by having one simple loan repayment, but also reduce your overall ongoing fees that come with having multiple debts like monthly or annual fees.
  
• Free up equity and cash. When you refinance your mortgage, your lender will reassess your loan-to-value ratio (LVR) based on how much you have paid off on your existing loan. This allows you to borrow more money for things like renovations, investments, or even that much-needed holiday.
  
• Increased flexibility. As your circumstances change, your home loan should too. Refinancing provides you with the flexibility to switch your mortgage from variable to fixed-rate and vice versa, depending on what suits your personal and financial situation.

How much does refinancing cost? 

It’s important to keep in mind that refinancing your mortgage does cost money. You need to take these into account when deciding whether to refinance. Home loan refinancing costs will vary depending on your individual circumstances but can be anywhere from $500 to over $1,000. 

The costs include:

• Lender discharge fee with your existing lender. This typically ranges from $150 — $400.
  
• Mortgage registration fee. As you’re creating a new mortgage, you’ll need to pay this fee again. The fee varies depending on your state government.
  
• Lender’s fee. This includes costs with your new lender, such as application costs, valuation fees, settlement fees, and annual fees.
  
• Break-cost fee. If your loan is fixed, it is important to ask your existing lender what the cost is of breaking your fixed-term loan early. This can be expensive depending on a myriad of factors such as loan size, interest rate and the duration of your remaining fixed term. 

Before moving forward, make sure to crunch the numbers to ensure the savings and benefits outweigh the costs. Use our refinancing comparison tool to find out how much you could save on your home loan, or speak to your mortgage broker.

Refinancing your mortgage during COVID-19

COVID-19 has caused Australia’s property market to grind to a screeching halt. Amidst an economic downturn and a seemingly inevitable recession, the RBA dropped interest rates to a record low of 0.25% in March — and as of 5 May, have maintained this rate.

Many lenders have passed on these cuts to their clients. The Big Four have all introduced lower interest rates for their 1, 2 and 3 year fixed-rate home loan products, both for existing customers and first-home buyers. 

Refinancing your mortgage during COVID-19 will allow you to take advantage of these lower interest rates. This example from our rate comparison calculator shows how much you could save by changing your lender during the pandemic:

	Existing Lender	New Lender
Home Loan Balance	$250,000	$250,000
Interest Rate	3.50%	2.80%
Monthly  Fees	$10	$10
Discharge Fees	$350	$350
Monthly Repayments (Principal and Interest)	$1,261.56	$1,169.69
	New lender will save you*	$27,562

*Note: The above calculation is based on a loan size of $250,000 over a 25-year term

It’s important to consider all the different factors and do your due diligence before making the leap. For more on what to look out for, check out this article.

Should I refinance my mortgage during COVID-19?

Before jumping in to refinance your mortgage during COVID-19, you need to carefully consider whether it makes sense for you at this stage in time. We’ve outlined a few instances where refinancing could work for you, and also some situations where it might be better to stick with your existing loan.

When should you refinance your mortgage?

• If your current lender’s rate is no longer competitive
• If your financial situation has changed or will change in the near future, even with COVID-19
• If you need a large sum of money in the short term (i.e. for renovations or future investments)
• If you’re looking to switch your variable home loan to a fixed-rate loan
• If you’ve accumulated considerable debt and want to consolidate your loans for a lower interest rate
• If you are looking at reducing your home loan repayments for your owner-occupied or investment property

When should you not refinance your mortgage?

• If you’re planning to sell your property in the near future
• If the additional fees outweigh the savings you’ll make for your loan
• If your credit history has taken a hit due to outstanding debts or missed repayments, as this might impact your ability to secure a good rate
• If you don’t have a reliable source of income to service your mortgage across the period of your loan term
• If you’re uncertain about your economic prospects in the short or mid-term due to COVID-19

If you’re not sure whether refinancing is a good option, speak to one of our mortgage brokers. Our experienced team will help you work out if refinancing is right for you, and find the best deal out there.