Reasons why refinancing can ensure you’re getting the best deal on your home loan
3 min read
Refinancing is something a finance broker may recommend you do every few years to ensure you are getting the best deal for your home loan. A good refinancing broker will help you understand when it’s time to refinance, which lender to target to best suit your changing needs or whether you’re better off sticking with your current provider.
Isn’t it better to stay with one bank?
Earlier this week we had a phone call from someone interested in understanding what a mortgage broker does. It was a great call and good to explain the benefits of working with a business such as Entourage. One of the questions that came up was around the benefits of staying with one bank. This particular individual explained they’ve been with their same bank all their life for all of their banking and lending needs and surely the bank would reward their loyalty.
Interestingly, the answer to this question can be no. Recent data published indicates that new borrowers can be paying an average of 0.90% less than existing borrowers of the bank. This means you are effectively paying a tip to the bank for showing loyalty to them. Ouch.
Why should I refinance?
Save money
The main reason people choose to refinance is to save money on their home loan repayments. In some cases, refinancing gets you a better interest rate or you may choose to refinance your loan term and reduce the repayment in the short term (more on this below). As mentioned, some lenders offer discounted rates for new borrowers, cashback offers for refinanced loans and other incentives to attract new clients.
Access equity
A refinance can also allow you to access equity to invest in other assets such as another property or shares, or to renovate your current home or investment. You may be able to simply redraw on your current loan without having to swap lenders. Read more on equity and how you can use it here <link to other blog>.
Vary loan terms
Another reason you might refinance is if you needed to change the terms of the loan – this could be to lower your repayments, consolidate other debt, change the rate or remove a guarantor. Many of these things can be done via an alteration with your current loan or through a refinance if there’s a better option out there.
Pay off debt faster
If you’ve recently received an inheritance, bonus or a large sum of money then it can be worthwhile reducing your mortgage principal and seeing whether there are other, more favourable options available with the lower LVR. A refinance in this situation may be beneficial to you.
Consolidate debt
You might also look to refinance if you are planning to consolidate debt. You may have other debt you’d prefer to roll over to a single payment. Other unsecured debt you may like to consolidate includes credit cards, personal loans or car loans.
How often should I refinance?
This depends on your circumstances and interest rate. According to RateCity most borrowers refinance their loan every 3-5 years. Some borrowers prefer to refinance at the end of their fixed loan term or the end of their interest only period.
Some people might find it beneficial to refinance every six months, although this can have deleterious effects on your credit report and should be carefully considered given the costs associated with refinancing. For most people, a refinance can be a bit of a hassle given all of the documentation required and they prefer not to have to do this too regularly.
When shouldn’t I refinance?
Fixed interest rate
If you are on a fixed interest rate, then it is may not be cost effective to refinance. Lenders sometimes charge a break fee if you break your fixed interest period, the formula for this figure is very long and complicated. The most important thing to note is that this figure can run into the thousands if you have a long time left on your loan, which means it usually costs you more to refinance than stick it out.
Not enough equity
If your equity has reduced below 20%, which is quite uncommon but can happen, then it’s probably not going to make sense to refinance as you are going to have to pay Lenders Mortgage Insurance. This can be expensive and will likely cost more than any savings you might make.
Recently started a business
Another situation you may need to wait to refinance is if you have recently changed employment or started a new business. Lenders generally need to see 2 years of profitable financials before they are willing to lend to you.
If it’s more expensive to change lenders
Refinancing can cost you money, this is because there are fees and charges associated with closing your old loan and opening a new one. You may save a certain amount in interest repayments, but you’ll need to calculate whether the savings are greater than the refinancing costs. It’s relatively simple to do, your broker will be able to give you a list of any fees along with the projected interest savings for the first year based on the current rate. If the savings is greater than the outlay, then it may be worthwhile.
Your loan balance has not decreased
Finally, if you are ten years into a 30 year loan term, you may have paid a substantial amount of interest and not much of the principal balance. If you refinance for another 30 years, your monthly repayment might decrease now, however your overall expenditure might end up being much higher. When you refinance you will need to consider whether to refinance with the same loan end date as the current loan, or whether to extend your loan term. If you are planning on putting the extra savings you’re making towards the principal then this strategy could be a good one, again worth speaking to your broker to run you through the calculations to understand what impact the extra repayments will have on the balance, interest charged and loan term.
Interested in seeing whether a refinance is right for you? Learn more about our refinance mortgage brokers based in Cremorne, Melbourne to get the best deal on your home loan!