11 things to consider before refinancing your mortgage

author-avatar By on August 02, 2021
11 things to consider before refinancing your mortgage

Refinancing your home loan can be a shrewd way of taking control of your debt.

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.

What to consider before refinancing a home loan:

  1. Why refinance?
  2. Costs to refinance a mortgage
  3. Property value and your equity
  4. Your credit rating
  5. Current home loan interest rates
  6. Honeymoon interest rates
  7. Loan term
  8. Loan features
  9. Debt consolidation
  10. Your timeframe
  11. Your current lender

1. Why refinance?

Take the time to properly consider exactly why you want to refinance your home loan.

Ask yourself:

  • 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.


Buying a home or looking to refinance? The table below features home loans with some of the lowest interest rates on the market for owner occupiers.

Lender
Advertised rate Comparison rate Monthly repayment Rate TypeOffsetRedrawOngoing FeeUpfront FeesLVRLump Sum RepaymentAdditional RepaymentsPre-approval
VariableMore details
LIMITED TIME OFFER

Smart Booster Home Loan Discounted Variable - 2yr (LVR < 80%)

  • Fast turnaround times, can meet 30-day settlement
  • For purchase and refinance, min 20% deposit
  • No ongoing or monthly fees, add offset for 0.10%
LIMITED TIME OFFER

Smart Booster Home Loan Discounted Variable - 2yr (LVR < 80%)

  • Fast turnaround times, can meet 30-day settlement
  • For purchase and refinance, min 20% deposit
  • No ongoing or monthly fees, add offset for 0.10%
VariableMore details
AN EASY ONLINE APPLICATION

Yard Home Loan (Principal and Interest) (Special) (LVR < 70%)

  • Unlimited additional repayments
  • Unlimited free redraws
  • Optional 100% offset can be added for $120 p.a.^
AN EASY ONLINE APPLICATION

Yard Home Loan (Principal and Interest) (Special) (LVR < 70%)

  • Unlimited additional repayments
  • Unlimited free redraws
  • Optional 100% offset can be added for $120 p.a.^
FixedMore details
NO UPFRONT OR ONGOING FEES

Basic Home Loan Fixed (Principal and Interest) (LVR < 70%) 3 Years

NO UPFRONT OR ONGOING FEES

Base criteria of: a $400,000 loan amount, variable, fixed, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. However, the ‘Compare Home Loans’ table allows for calculations to made on variables as selected and input by the user. All products will list the LVR with the product and rate which are clearly published on the Product Provider’s web site. Monthly repayments, once the base criteria are altered by the user, will be based on the selected products’ advertised rates and determined by the loan amount, repayment type, loan term and LVR as input by the user/you. Rates correct as of October 19, 2021. 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.


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!


Disclaimers

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 2020. They are (in descending order): Great Southern Bank, 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 2020) has more than $9 billion in Australian funded loans and advances. These groups are: Resimac, Pepper, Liberty and Firstmac.
  • If you click on a product link and you are referred to a Product or Service Provider’s web page, it is highly likely that a commercial relationship exists between that Product or Service Provider and Savings.com.au

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, Performance Drive 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.

*Comparison rate is based on a loan of $150,000 over a term of 25 years. Please note the comparison rate only applies to the examples given. Different loan amounts and terms will result in different comparison rates. Costs such as redraw fees and costs savings, such as fee waivers, are not included in the comparison rate but may influence the cost of the loan.

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Alex joined Savings.com.au as a finance journalist in 2019. He enjoys covering in-depth economical releases and breaking down how they might affect the everyday punter. He is passionate about providing Australians with the information and tools needed to make them financially stable for their futures.

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