Should you refinance your home loan?
For many, a home loan is the biggest financial commitment they’ll make in their lives. But even once you’ve made the commitment, you can revise your loan so that it still works for you.
So is it a good idea to refinance? Why should you do it? And when may it not be a good time to switch loans? Only you can decide what’s right for you and your current situation, but we’ve got some pointers to help you figure it all out.
What does it mean to refinance a home loan?
Refinancing your home is when you pay out your current home loan with a new one, either with your existing lender or a different one. You’ll likely be refinancing because the new loan will have a different rate or terms, letting you be more flexible with your money and adapt the loan to suit changing life circumstances.
Reasons to refinance your home loan
You want to secure a better interest rate
Wanting to secure a lower interest rate and reduce your monthly repayments is a common reason for refinancing a home loan. Refinancing to a home loan with an interest rate just 0.25% lower than your current one can mean a large reduction in interest repayments over the life of your loan.
Use a refinance calculator
Many lenders will usually have a refinance calculator on their website, which lets you input the relevant details of your home loan (such as the estimated market value of your home, the outstanding loan amount, your current rate, and more) and work out any potential refinance savings.
Your fixed rate period is ending
If the fixed rate period on your home loan is ending, then it might be a good time to refinance, as you may be able to avoid paying a break fee. Once your fixed rate ends, your loan will automatically switch to a variable rate.
You may want to refinance to take advantage of a lower variable rate. Or, you may want to switch from a variable rate to a fixed rate if you want to ensure your repayments will remain the same for a period of time.
You want to receive additional or better loan features
One reason to consider refinance is to take advantage of more or better features of a different loan. Switching to a home loan that, for example, lets you make unlimited extra repayments - without charging you any fees - could mean you pay off your loan sooner.
Here are some common loan features:
- Flexible repayments: the ability to make extra repayments with no additional fees to help you pay off your loan more quickly.
- Repayment holiday: reduced repayments or a complete break from repayments in case of changing situations, such as change of employment or maternity leave.
- Offset account: a transaction account that’s linked to your home loan, the balance of which can be offset against what you owe on your home loan.
- Redraw facility: lets you withdraw any additional repayments you’ve made on your loan, in case you need cash.
- Portability: lets you keep the same loan when you move from one home to another, so you can save yourself the cost and effort of getting a new loan.
You may also want a loan with flexible rate options, like a split loan (where you can choose a fixed rate for part of your loan and a variable rate for the remainder) or the ability to make interest-only payments for a period of time.
You want to make your finances easier to manage
If you want to make your home loan easier to manage, you might want to consider consolidating your debt. Like many Australians, you may have a number of debts - such as a personal loan or car loan - in addition to your home loan.
Refinancing your home loan could potentially reduce the overall interest you pay on these debts through debt consolidation. There may also be some benefits (usually fee waivers and discounts) if you have your home loan and bank account with the same financial institution.
Debt consolidation can have some drawbacks. For example, if you turn a short term debt (such as a personal loan) into a long term debt, you’ll be paying interest for a longer period, which may cost you more overall.
For debt consolidation to save you money, you’ll likely need to make additional repayments to pay off the larger loan as quickly as possible.
You want to access home equity
Your home is probably one of your most (if not your most) valuable assets. If you’ve repaid a substantial amount of your home loan or its value has increased, you have equity. You can use equity to build additional wealth, such as using it instead of a cash deposit to purchase an investment property.
If your property has increased in value, then you might want to look for a new home loan with a lower rate, as borrowers with higher equity can get a better rate with some lenders.
When you should not refinance your home loan
Conversely, there are some situations where refinancing won’t actually let you pocket more savings. At what point is it not worth it to refinance? We go through a few common reasons below.
Your fixed rate break costs are very high
Refinancing a home loan is never free. You’ll likely have to pay to break a fixed rate home loan, and if this fee is too high, then refinancing may not be worth it. Ensure that you check these costs with your current lender and compare them with the savings you’ll pocket with the new home loan.
You have less than 20% equity in your home
If you have less than 20% equity in your home (which means you’re borrowing 80% or more than your home’s market value), then you will have to pay lenders mortgage insurance if you refinance, even if you paid it on your first home loan.
The amount you pay for the insurance varies depending on the loan amount and deposit, but this cost is usually significant.
Your loan amount is small
The loan amount is the amount you owe. If you don’t have much left to repay on your mortgage, then the savings you’d get from refinancing might not be worth the headache and might not actually save you money in the long run.
The costs of refinancing your home loan
When looking to refinance, you should consider any upfront and ongoing costs associated with exiting your existing loan and switching to a new one.
These may include (but aren’t limited to):
- Exit or discharge fee: lenders often charge a fee to exit a home loan - this can be a percentage of the remaining loan balance or a fixed amount.
- Application fee: charged when you apply for a new home loan.
- Settlement fee: a fee to pay out your current mortgage.
- Valuation fee: a fee for a lender to have your property valued.
- Stamp duty: some states charge a tax on your mortgage, which is stamp duty. In New South Wales, this is referred to as 'transfer duty'.
- Mortgage registration fee: a fee to register your mortgage onto the title record for the property.
If you want to read more on home loans, you can read our Home Loan Buying Guide. We go through the different types of lenders and what to consider when you compare home loans.