Why should you refinance your home loan?

Most homeowners in Australia think about refinancing at some point. 

Why? It’s because it is a proven way to save money and adjust according to the changing circumstances. While it’s beneficial to consider refinancing regularly, you should know how often it can and should be done. If you are planning to refinance your loan, here is everything you need to know about it 

Why should you refinance your home loan?

There are numerous reasons why people choose to refinance their home loans. One of the most prominent reasons is saving money. By adopting a lower interest rate, homeowners can acquire a better vantage point from where they can save money. Therefore, it is safe to say that refinancing is nothing short of a boon for homeowners. 

You know, even a minimal fluctuation in the interest rate can create a big difference in the overall amount you pay back for your loan. After recent changes in interest rates many borrowers need to pay much more than 2 years ago and some of them need to work extra hours to meet the repayments comfortably enough. 

If you get a payraise, you can increase your minimum loan repayment amount to pay off your loan faster and save on interest.

Additionally, you can consider refinancing to lower your repayment amounts if you experience a drop in your income. You can extend the term of your loan to dilute the financial stress. However, don’t forget that you can refinance again if your income increases in the future. 

Additional reasons for refinancing may include:

• Consolidating your debt 
• Accessing your equity
• Changing variable interest rate to fixed rate
• Adding loan features, such as offset account

How to find out if your interest rate is still competitive?

We recommend you do some research every 6 to 12 months in order to check how your interest rate and home loan features are compared to the market and other lenders. You can easily do this exercise online by using our home loan comparison tools. Also, it would be better to see what interest rates your existing lender offers to new customers. Who knows, the rates might be lower than your current rate. Use our online calculator and check how much you can potentially save by refinancing your loan now.

Your interest rate is too high – what’s next now?

After comparing your home loan’s interest rate, if you found that your current lender is offering lower rates to new customers, you need to talk to them. Never hesitate to directly ask them for the new interest rate. If you think you don’t have the right knowledge to ask for negotiations, getting expert help would be the best bet! Our Home Loan Specialists would love to negotiate on your behalf if you want them to. Provide them with the relevant paperwork and allow them to do all the heavy lifting for you. If you have any questions along the way, we are ready to assist you in your refinancing journey.

Keep in mind that home loans are more than just interest rates. They come with many additional charges, such as establishment and annual fees. These additions can outweigh the low interest rate. So, it’s crucial to calculate them to find out if refinancing is beneficial for you in the long run. 

How soon should you refinance your home loan?

Although there are no strict rules about when to refinance, you should follow some guidelines. 

The first thing to take note of is that you need to have at least 20% equity in your home before refinancing. This will help you avoid paying Lenders Mortgage Insurance (LMI). Besides, every homeowner has different circumstances. Sometimes it makes sense to refinance after 6 months, and other times borrowers might refinance after 6 years. Strictly speaking, it’s a better idea to look into refinancing every couple of years and compare interest rates more frequently.

Remember that equity is determined by figuring out the difference between your loan balance and the current value of your property. So, it’s likely that the value has changed since you purchased your property, which means lenders will need to conduct a property evaluation before refinancing.

Consider the costs involved in refinancing, as it may cost more than interest savings. It would be great if you could consult an expert to ensure whether you need refinancing. 

Fixed Vs. Variable Interest Rate: Which one to Choose?

After the pandemic, some homeowners are looking for the security offered in fixed-rate home loans. If there will be a significant change in interest rates in the coming months, those with fixed-rate loans will not be impacted by these changes.

However, homeowners who prefer flexibility in their home loans can opt for a variable loan rate. Although you can still refinance when your home loan has a fixed rate, you need to take care of a few things.  

Remember that fixed-rate home loans are fixed for a certain time – normally 1 to 5 years. 

So, when you want to refinance during that fixed time, you would face some break costs that are fees charged by lenders when a borrower breaks the home loan. Before you refinance, contact your lender to figure out what you can expect to pay in break fees. Some may not charge you for breaking your home loan if you refinance with your existing lender.

Final thoughts 

As you can notice, there’s no specific limit on the number of times that you can or should refinance your home loan. However, it is important to consider the factors that may limit your practical ability to refinance, such as the amount of equity for cash-out refinances, closing costs, prepayment penalties, and credit requirements. When you refinance multiple times, you can meet your payments if there is any foreclosure or falling interest rates. 

To see how much you'll save with refinancing, contact us today.