When is the right time to refinance your home loan

Refinancing your home loan means replacing your existing mortgage with a new one—either with your current lender or a different one. Just like reviewing your energy provider or insurance, checking your home loan regularly can help you save money and get better features. Here’s how to know if refinancing is right for you.

When should you consider refinancing?

Several situations might prompt you to consider refinancing your home loan. Some of the common reasons why people may consider refinancing include:

You could secure a lower rate

One of the most common reasons Australians refinance their home loan is to snag a lower interest rate. It might seem like a small thing, but even a tiny reduction can lead to massive savings over the life of your loan.

Here's a concrete example: Let's say you have a $500,000 mortgage. Dropping your interest rate from 5.5% to 5.0% could save you tens of thousands of dollars over the term of the loan and shave years off your repayment period. Who wouldn't want that?

Right now, you can find refinance rates starting from around 4.84% p.a. This opportunity could arise because of changes in the market, like the RBA cutting the official cash rate. It can also happen because your financial situation has improved – maybe you've increased your income, paid off other debts, or your credit score has gone up, making you eligible for better rates.

It's always worth comparing your current interest rate with what other lenders are offering, especially since new customers often receive the most competitive deals. In fact, the average mortgage rate in Australia is often noticeably higher for existing customers compared to those who are new to the lender. So, even if you're happy with your current bank, it pays to shop around and see if you could be paying less elsewhere!

Your fixed rate period is ending

If you have a fixed-rate home loan, it's crucial to start considering your options a few months before your fixed term expires. When the fixed period ends, your loan will typically revert to a potentially higher variable "revert rate".

Refinancing before this happens can help you secure a new fixed rate at a potentially lower level or switch to a variable rate loan that better suits your current needs and the prevailing interest rate environment.  

You want to access your home equity

Refinancing can be a way to access the equity you've built up in your home. Home equity is the difference between your home's current value and the amount you still owe on your mortgage. By refinancing for a larger loan amount, you can access these funds for various purposes, such as home renovations, investing, or other significant expenses. However, it's important to ensure you're comfortable with the increased loan amount and repayments.  

What is home equity?

Home equity is the difference between your property's market value and the amount you still owe on your mortgage.

How to calculate your home equity?

Home equity = Property Value – Remaining Loan Balance

For example, if your home is worth $800,000 and your mortgage balance is $500,000, your equity is $300,000.

How can you use home equity?

You can access your home equity through:

Refinancing – Borrow against your equity for renovations, investments, or major expenses.

Home Equity Loan – A separate loan using your equity as collateral.

Line of Credit – Flexible access to funds based on your available equity.

Lenders typically allow you to borrow up to 80% of your home’s value, but this depends on your financial situation. Building equity over time can improve your borrowing power and financial security.

You want to consolidate debt

If you have other debts with higher interest rates, such as personal loans or credit cards, you might consider refinancing your home loan to consolidate these debts. By rolling these debts into your mortgage, you could potentially benefit from a lower overall interest rate and simplify your repayments into a single loan.  

Your current loan doesn't meet your needs

As your life circumstances change, your home loan’s features and flexibility might no longer be ideal. You may now want an offset account to reduce interest or a redraw facility to access extra repayments. Refinancing lets you switch to a loan that better aligns with your financial goals.

However, not all loans offer the same benefits, so it's crucial to compare options carefully. Look beyond the interest rate—consider fees, loan terms, and features that add real value. Always calculate the costs of switching to ensure refinancing delivers the benefits you seek.

Your financial situation has changed

A salary increase, career change, or improved financial standing could make you eligible for better loan terms. Refinancing to a shorter loan term, even if the interest rate stays the same, can save you thousands in interest. For example, refinancing a $600,000 loan at 6.00% p.a. from 25 years to 24 years could save over $26,000 in interest.

However, refinancing isn't always necessary. If your current loan allows, making extra repayments can also help reduce your loan term and interest costs without the need for a full refinance. Always check if your lender permits additional repayments and if any restrictions apply.

Factors to consider before refinancing

While the potential benefits of refinancing can be attractive, it's essential to carefully consider several factors before making a decision.

The costs involved

Refinancing isn't free, and you need to factor in the various costs involved to determine if it's financially worthwhile. These costs can vary but typically include:  

• Discharge fees: Fees charged by your current lender to close your existing loan, typically ranging from $350 to $500.
• Application or establishment fees: Fees charged by the new lender to set up your new loan, which can range from $150 to $750. Some lenders may waive these fees.
• Property valuation fees: The new lender may require a valuation of your property but lenders often cover this cost.
• Mortgage registration fees: Fees charged by the state government to register the new mortgage, potentially costing between $130 and $240 depending on the state. You might also encounter a deregistration fee from your current lender.
• Settlement fees: Legal or conveyancing costs associated with the new loan.
• Break costs: If you have a fixed-rate loan and refinance before the end of the fixed term, your current lender may charge a break fee to cover any potential losses. These can be significant, so it's crucial to get an estimate from your lender.
• Lenders Mortgage Insurance (LMI): If your loan-to-value ratio (LVR) is over 80% with the new loan, you may have to pay LMI again, even if you paid it on your original loan.  

It's crucial to calculate the total cost of refinancing and compare it to the potential savings from a lower interest rate or other benefits over the expected term of your loan. Homeowners generally refinance their mortgage about five years after purchasing their property.

Your Loan-to-Value Ratio (LVR)

Your LVR, which is the amount of your loan compared to the value of your property, plays a significant role in your refinancing options. If your LVR is high (above 80%), you might have fewer refinancing options and may need to pay LMI. Building up more equity in your home can improve your refinancing prospects and potentially give you access to better interest rates.  

Your credit score

A good credit score is essential when applying for any new loan, including a refinanced home loan. Lenders will assess your credit history to determine your creditworthiness. A lower credit score might result in higher interest rates or even rejection of your application. Make sure you check your credit score before you consider refinancing - it can help you negotiate a better interest rate and also understand how lenders may view you as a borrower. 

The length of your new loan

Be mindful of the loan term when refinancing. While refinancing to a lower interest rate might reduce your monthly repayments, extending your loan term could mean you end up paying more interest over the life of the loan. Aim to keep a similar loan term to your existing mortgage, or even shorten it if your financial situation allows.  

Look beyond the headline rate

Don't just focus on the interest rate when comparing refinancing options. Consider all the fees, features, and flexibility offered by different lenders and loan products. A slightly higher interest rate might be offset by lower fees or more beneficial features, such as an offset account.  

Is it the right time to refinance your home loan

Determining the right time to refinance your home loan depends on a combination of your individual circumstances, the current state of the market, and your future financial goals. Regularly reviewing your home loan and comparing it with other options available can help you identify opportunities to save money, access equity, or obtain more suitable loan features.

By carefully considering the potential benefits and costs, and staying informed about interest rate trends, you can make a well-informed decision about when refinancing is the right move for you.