Refinancing your home loan can be a shrewd way of taking control of your debt.
What to consider before refinancing a home loan:
- Why refinance?
- Costs to refinance a mortgage
- Property value and your equity
- Your credit rating
- Current home loan interest rates
- Honeymoon interest rates
- Loan term
- Loan features
- Debt consolidation
- Your timeframe
- Your current lender
Doing so can help you to either generate savings or leverage your wealth growth. But like many things in the money world, refinancing can sting you if you’re not careful, so there are a few things you should consider before refinancing your home loan.
1. Why refinance?
Take the time to properly consider exactly why you want to refinance your home loan.
- Do you want to get a cheaper rate?
- Do you want more flexibility in the loan (e.g. with an offset account or redraw facility)?
- Are you consolidating debt?
- Do you need to access the equity to pay for something major such as a renovation?
- Do you want to increase or shorten your loan term?
Having a clear understanding of what you hope to achieve by refinancing can help you make a better decision.
2. Costs to refinance a mortgage
The numerous costs of refinancing a home loan can sometimes set you back thousands, leaving you wondering whether it was worth it.
To avoid any ugly surprises, look at the terms and conditions of both your existing home loan and the loan you’re looking to refinance with, to discover what the ‘change’ costs will be e.g. discharge fees, valuation fees, break costs etc.
If you’re refinancing to get a lower interest rate, you should first calculate how much less you’ll pay in interest at that rate (you can do this using our home loan repayments calculator) and compare this saving to the total cost of refinancing. That should give you an idea of whether the refinance is worth it.
You may find that through the interest savings, you’ll make back the refinancing costs within months.
3. Property value & your equity
Whether you’re refinancing to secure a lower interest rate or to access more funding, you need to consider the current value of your property and how much equity you have in it. Your loan-to-value ratio (LVR) reflects your equity (e.g. if it’s 70%, your equity is 30% of the property’s value). If your property value has risen, your LVR would be lower and you’ll have more equity in the property.
Keep in mind, the lender may value your property less than what you think it is worth.
When refinancing to get a cheaper interest rate, a lower LVR will generally stand you in good stead. But if you try to refinance with an LVR that is higher than 80%, you may struggle to qualify for a cheaper rate. If you’re refinancing to another lender, you may also face having to pay for Lenders Mortgage Insurance – even if you already paid for it when you first took out the loan.
When refinancing to access some of your equity (e.g. to pay for a renovation or to invest it in another property), you’ll generally be able to borrow up to 80% of the property’s value minus the outstanding debt. For example, if your property was worth $1 million and you had $600,000 owing on the mortgage ($400,000 in equity, 60% LVR), you may have up to $200,000 in equity available to borrow. Borrowing any more than that will push your LVR over 80%, which many lenders avoid.
4. Credit rating
Have you checked your credit rating recently? If it’s not so great, you might find it working against your efforts to refinance.
Also, since refinancing represents an application for credit, it appears on your credit report and can influence your credit score. Lenders can be wary of those who refinance too often, so having numerous mortgage refinances on your credit report can affect your interest rate bargaining power or indeed your actual eligibility to be able to refinance.
5. Current home loan interest rates
Read some of the latest news on what interest rates are doing in the home loan market and what a variety of experts are predicting. If interest rates are expected to rise over the next few years, you might want to consider refinancing to a fixed rate product.
Base criteria of: a $400,000 loan amount, variable, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 75%. The product and rate must be clearly published on the Product Provider’s web site. Introductory rate products were not considered for selection. Monthly repayments were calculated based on the selected products’ advertised rates, applied to a $400,000 loan with a 30-year loan term. Rates correct as at 17 February 2020. View disclaimer.
You should also consider whether some lenders will raise rates soon. It can be pretty upsetting when you switch to a new home loan for its low interest rate before getting whacked with a rate rise within a few months. Very generally, if a lender has recently cut or raised its rates, that lender is fairly unlikely to move rates again soon afterwards.
How can you turn an interest rate rise into an interest rate drop? 🤔 pic.twitter.com/gqCLqhR0FI— Sunrise (@sunriseon7) September 2, 2018
6. Honeymoon rates (introductory rates)
Do you know if you’re refinancing to a loan with an introductory or honeymoon rate? If so, do you know what rate the loan will revert to at the end of the introductory period (often one to three years)?
You should also consider this for interest-only and fixed rate home loans – what will the rate revert to after the interest-only or fixed-rate period has passed? Revert rates are almost always higher.
In some instances, borrowers face the risk of being stuck with a high revert rate and unable to refinance to another lender at a lower rate – effectively becoming a prisoner to their mortgage. This could be because a lender’s lending criteria has tightened, your credit score has worsened or your property value has fallen for some reason – raising your loan-to-value ratio (LVR).
7. Loan term
Think about what loan term you’re refinancing to – is it going to be longer, shorter or the same as the remaining term on your current loan? Be wary that while refinancing to a longer term can reduce your regular repayment amount, the total cost of the loan will be more (because interest is accruing over a longer period).
Refinancing to a shorter term has the opposite effect of increasing your regular repayment amount, but saving you on the total interest payable.
8. Loan features
A loan with a cheaper rate doesn’t necessarily represent the ‘best value’. When refinancing to find a better deal, consider useful home loan features such as a redraw facility or an offset account.
9. Debt consolidation
If you have significant debts outside your mortgage, (such as a car loan, personal loan or credit card debts) you could consider consolidating these into the mortgage when refinancing.
This can make it easier to manage your debts because you’re repaying them all through the one regular repayment (weekly, fortnightly or monthly). The consolidated debts will revert to the interest rate of the mortgage, which may be significantly lower than the interest rates you were paying when they were standalone debts (credit cards can have interest rates of over 20% p.a.). However, because of the longer term of the loan, the total interest payable for the consolidated debts may be higher.
10. Your timeframe
Are you definitely going to continue owning the property long-term?
If you sold the property shortly after refinancing to a lower interest rate, you may not have had enough time to accrue the significant interest savings required to make the refinance worth it.
11. Your current lender
If you haven’t already, you should call your current lender before refinancing somewhere else. Many lenders have large teams of people on hand to retain their current customers because it’s easier to keep one than find another.
To encourage you to stay, your current lender may offer you a better deal on your home loan than what you were considering elsewhere, so don’t be hesitant to pick up the phone to negotiate!
You generally do not need to pay a deposit when refinancing your home loan, but there are a range of fees you’ll probably have to pay. You may also have to pay for LMI if the value of your equity in the property (your initial deposit, plus the sum of your principal repayments so far and any capital gains) is less than 20% of the property’s value, or if you’re refinancing the loan to over 80% of the property’s value.
Most people don’t realise that every application for credit goes into their personal credit file. Refinancing your home loan often could impact your credit score which can make it difficult to receive lower interest rates for future applications.
Many loans have a maximum LVR of 95%, which means you can’t borrow any more than 95% of the value of your home. If you want to refinance, this means you must have at least 5% equity in your property. When it comes to refinancing, a general rule of thumb is to have 20% equity in the property to avoid having to pay for LMI.
Refinancing a mortgage can be costly, however, these costs can be recouped over time if you’re refinancing to a loan with a lower interest rate. The discharge fee will generally cost between $100-$400. The setup fees for the new loan can cost between $300-$1,000. A standard valuation fee alone can be between $200-$500.
To work out what your monthly repayments might be and how much you could save by refinancing, you can use our home loan repayment calculator.
You may want to refinance your mortgage for a range of reasons, including if you want to reduce your home loan interest rate, if you’re unhappy with your current lender, to consolidate debt, to fund a home renovation or extension, or to fund a big purchase (such as a car) at a lower interest rate.
The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered which includes retail products from at least the big four banks, the top 10 customer-owned institutions and Australia’s larger non-banks:
- The big four banks are: ANZ, CBA, NAB and Westpac
- The top 10 customer-owned Institutions are the ten largest mutual banks, credit unions and building societies in Australia, ranked by assets under management in November 2019. They are (in descending order): Credit Union Australia, Newcastle Permanent, Heritage Bank, Peoples’ Choice Credit Union, Teachers Mutual Bank, Greater Bank, IMB Bank, Beyond Bank, Bank Australia and P&N Bank.
- The larger non-bank lenders are those who (in 2019) has more than $9 billion in Australian funded loans and advances. These groups are: Resimac, Pepper, Liberty and Firstmac.
Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site.
In the interests of full disclosure, Savings.com.au and loans.com.au are part of the Firstmac Group. To read about how Savings.com.au manages potential conflicts of interest, along with how we get paid, please click through onto the web site links.
*The Comparison rate is based on a $150,000 loan over 25 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate.
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