What is refinancing?
To put it simply, refinancing a mortgage means switching from your existing home loan product to another.
You can refinance your home loan with your existing lender, or get a new home loan product with a new lender. The choice is entirely yours. Prior to 2011, lenders could charge enormous fees to borrowers who refinanced their loans within a specified period. Luckily, the Federal Government banned exit fees making refinancing a relatively simple process.
The main reasons people tend to refinance their home loan are:
- Save money: get a better deal on their interest rate
- Switch between variable and fixed rates
- Access flexible features e.g. offset accounts
- Access the equity in their home
- Consolidating debts
If you’re weighing up refinancing your mortgage, it’s up to you to decide whether it’s the right move for your current situation and circumstances. To work out how much you could potentially save by refinancing your loan, visit our refinance home loan calculator.
How to compare when refinancing?
The home loan market is full of different products offering a wide range of deals and options, so take the time to choose a home loan that will work for you.
As with any home loan, one of the first things you’ll need to determine is what type of interest rate you’ll choose when you make the switch.
By locking in your interest rate with a fixed interest rate, you have certainty around your repayments; however you do need to be comfortable that you will not want to change or end your fixed rate loan prematurely, as that can incur a significant ‘break fee’ charge.
This option will offer competitive rates as well as flexible features. For example, a 100% offset account facility is usually only available with variable rate loans. One thing to be aware of with variable interest rates is that they can fluctuate up or down at any time, however they generally move in sync with Australia’s cash rate. So, if interest rates do rise, you’ll need to be able to make higher repayments.
Split rate loan:
As the name suggests, this option allows you to set a fixed rate for a percentage of your loan to provide some security and confidence around interest rates, with the remaining percentage at a variable rate to take advantage of flexible features.
You also want to take flexible features into account when you’re looking to refinance your home loan. While one type of home loan may offer a range of features, another may not.
This feature simply allows you to make additional payments which will bring down the amount of interest you pay and also shorten the life of the loan; saving you thousands.
Another way to bring down the interest you pay is by refinancing to a home loan that comes with an offset account. A mortgage offset is effectively a transaction account linked to your home loan. Because the balance of your home loan is offset daily against the home loan principal, any money in the offset account will reduce the amount of interest you pay. So if you have an offset account with a balance of $40,000 and a home loan of $500,000, you’ll only be charged interest on $460,000.
Always look for a home loan that allows you to choose your repayment schedule. A simple move like setting up your repayments to a fortnightly schedule, rather than monthly, can save you a lot of money in the long term.
Much like applying for your first home loan, refinancing a home loan often involves paying fees and charges. These could include government fees, and establishment or other upfront fees on your new loan. If you are moving to a new lender you may also have to pay a valuation fee, which is usually around $300. The total costs of refinancing can add up to around $1,000 on average.
If your current loan is on a fixed interest rate and you haven’t finished the full term of the loan, you will most likely need to pay break fees.
When it’s not worth refinancing your mortgage
There are times when refinancing your home loan is not the best idea. At the most obvious level, you may actually already have the best home loan offer around. However, even if you do find a lower rate when comparing home loans, refinancing may not be a good move. Common reasons refinancing may not be worth it include:
You are in the middle of a fixed term
Fixed rate home loans often come with break fees if you wish to end the loan before the full term. This means, if you pay off or refinance your loan before the fixed period ends, you might get hit with a hefty fee. It’s best to ask your lender for an estimate of that fee so you can make an informed decision about whether refinancing would ultimately cost you money.
You still have an LVR above 80%
Refinancing your home loan when you still need to borrow more than 80% of your home’s value will mean you’ll have to pay LMI all over again.
Don’t have much time remaining on your loan term
Always weigh up the costs versus benefits to find out whether it’s the right option to refinance.
You’re thinking of selling soon
It’s no use paying for fees associated with refinancing if you are just going to sell the property and discharge the mortgage anyway. Given it often takes at least a few months to recoup the costs of refinancing, if you’re thinking of selling in this period then it’s probably just best to stick with your current mortgage.
Refinance Home Loans Glossary of Terms
|Comparison Rate||A Comparison Rate is the interest rate plus fees and charges rolled into a single percentage rate for ease of comparison.|
|Exit cost||The fee charged to borrowers if they exit their home loan early. This is usually applied to fixed interest rate loans.|
|Fixed interest rate||Fixed interest rates are interest rates that are locked in for a certain period of time, usually between one and five years.|
|Lenders Mortgage Insurance (LMI)||An insurance that protects the home loan lender, if a borrower defaults on their payments. An LMI is typically applied to home loans where the loan to value ratio (LVR) is higher than 80%, or the borrower has a deposit of less than 20%.|
|Loan to Value Ratio (LVR)||Most lenders require an LVR of 80%, this means the borrower will pay 20% of the value of the property. Essentially, it is the size of a home loan compared to the value of the property.|
|Offset||An offset account is a transaction bank account connected to your home loan. The money from this account is used to offset your home loan, which means you’re only charged interest on the difference between the total loan balance and the amount offset. For example, if you owe $200,000 on your home loan but you have $20,000 in your offset account, the bank would only calculate interest on $180,000.|
|Fees||Home loans usually come with a range of fees such as redraw fees that are charged monthly or annually over the life of the loan.|
|Overdraft||An overdraft is an extension of credit from a lending institution. Overdrafts are granted when an account reaches zero or there are insufficient funds to make a withdrawal. In property, it can be used as a line of credit, secured by the equity in the property.|
|Split Rate Home Loans||A split home loan is when you divide your loan into two parts. This means a portion of the loan could come under a fixed interest rate with the remainder being variable.|
|Variable Rate Loan||Variable home loans are defined by the potential for interest rate fluctuations. The variable interest rate may be changed regularly by a lender and is usually dictated by the Reserve Bank of Australia’s (RBA) official cash rate and changes in market interest rates. Due to interest rate fluctuations, your monthly repayments could vary from month to month. With lower exit fees, more flexible repayment options and useful features like offset accounts and redraw facilities, variable home loans have been found to be the preferred choice for many Australians.|