When is the right time to refinance your home loan?

Mark Fitzpatrick | April 05, 2018

Refinancing a home loan – or moving your mortgage to a new provider – can sometimes save you real money. But you should always look beyond the headline interest rate to work out the real cost of switching.

Refinancing happens when you move your home loan from your current lender to a new one. It’s a strategy people often use when they want to borrow more money for a renovation or when they want to secure a better interest rate or better terms on their loan repayments.

But there are often costs involved in refinancing, which means it can sometimes leave you worse, not better, off. In this article, we explore when it makes sense to refinance and when it doesn’t.

Why would you choose to refinance your home loan?

Some of the main reasons you may choose to refinance your home loan include:

* Being unhappy with your current lender. By shopping around you may find another lender will give you a better interest rate, better terms, or better customer experience or features.

* To fund a home renovation or extension. Generally, when you extend or renovate your home you’ll need to borrow more money. This is often a prompt to look around for a better deal and refinance, although you may also be able to increase the amount of your current loan.

* To consolidate debt. If you owe money on debts such as credit cards, personal loans or car loans, you may be able to save money by rolling them into your mortgage. Again, you may be able to do this through your current lender but you also may consider refinancing.

* To buy a vehicle or other large item at low-interest rates. Car loans tend to attract higher interest rates than home loans, so you may choose to fund the cost of the vehicle by borrowing against your home. You could choose to do this through your current lender or it may be a good time to look around for a new loan.

* To reduce mortgage repayments. By refinancing and taking on a new loan over a longer timeframe or switching to a loan offering a fixed interest rate, you may be able to reduce the amount you need to pay each month.

What’s the downside to refinancing?

Because refinancing involves setting up a new loan, you’ll have to go through the loan application process all over again. Although you can now do this over the phone, you will still have to supply supporting documents and you may not be approved.

Applying for a new loan also usually involves costs. This often includes a loan establishment fee. You’ll often also be charged fees for canceling your existing home loan. If you’re currently on a fixed rate, that may include break costs. And if your new loan is more than 80% loan to value ratio (LVR) you may need to pay lenders mortgage insurance (LMI).

If all of your bank accounts are with the same lender as your home loan, there will also be the new inconvenience of having your home loan with another provider. This may particularly affect you if you have a mortgage offset account, in which case it may make sense to move all your funds, and not just your home loan, to your new lender.

What are the alternatives to refinancing?

There are alternatives to refinancing, which may be worth exploring before you make the decision to refinance. For instance, if your goal is to reduce your interest repayments, you could call your lender to find out whether you can negotiate a lower interest rate or have your repayments fixed for a period of time. This may work out cheaper than switching lenders.

You might also consider extending the term of your existing loan – which will lead to a lower monthly repayment. Alternatively, you may decide to explore switching to interest only for a short period, especially if your earnings drop due to parental leave or an absence from the workforce. Just be aware that both of these options will add to the cost of your loan over the long term and involve a credit decision from your lender.

What should I look for when I’m considering refinancing?

Refinancing is essentially like taking out a home loan all over again, so you need to do your research on which home loan is right for you.

Many lenders will advertise a low headline interest rate. But these aren’t the only numbers to look at when you’re considering refinancing. The comparison rate will give you a better idea of the real cost of switching loans because it reveals the rate of interest you’ll be paying when other fees and charges are taken into account too.

What do I need to do once I’ve made the decision to refinance?

Once you’ve made the decision to refinance, you’ll need to go through the loan application process. This can take some time, especially as it will often require having your property valued.

Once you’re approved, you may have to wait a few weeks for your loan to be switched, as it will have to pass through the internal processes of both your current lender and your new one.

Always remember…

Finally, it always pays to remember that whether or not refinancing suits you will come down to your own financial goals and personal circumstance. If you’d like to know more, speak to your financial adviser.

Your refinancing checklist

Before you refinance:

* Ask yourself why you want to refinance and do your research on what deals are available

* Speak to us at Astute Financial Port Macquarie to see what we can offer

* Examine the real cost of switching, including comparison rates and offset accounts

The information contained in this article is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, Astute Financial Port Macquarie recommends that you consider whether it is appropriate for your circumstances. Astute Financial Port Macquarie recommends that you seek independent legal, financial, and taxation advice before acting on any information in this article.

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