Refinancing your mortgage involves deciding whether to switch lenders or keep your existing loan after researching, getting advice, and comparing options. And while most homeowners refinance every three to four years, there are times when homeowners can stay in the same mortgage for years.
The answer to when you should refinance, therefore, depends on a whole host of factors that are specific to your financial situation and needs. Continue reading this article to learn more.
When Do Most Homeowners Decide To Refinance?
Most homeowners decide to refinance when they find a lender they can switch to, with better options such as a lower interest rate.
Homeowners usually consider refinancing when their fixed-rate term is ending, with most homeowners choosing to refinance their mortgage every 3 to 4 years.
During this period, the loan balance usually decreases while property value increases, creating a strong position to negotiate better terms or find more flexible products.
Apart from interest rates, there are other strategic reasons borrowers choose to refinance:
- Switching lenders to release equity for buying an investment property if the current lender is reluctant.
- Consolidating debt to combine existing debts into the home loan at a much lower interest rate.
- Seeking a more flexible product that better suits changing lifestyle needs.
What Are The Eligibility Requirements For Refinancing?
To successfully refinance, you generally need to meet specific financial criteria:
- Owe less than 80% of the property value to avoid paying LMI.
- Have sufficient income evidence to move from a low doc mortgage to a full doc standard home loan.
- A Loan to Value Ratio (LVR) of 80% or less and have cleared black marks from your credit file.
- Avoid refinancing too frequently (e.g., every 6 months) as it adds enquiries to your credit file.
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How Often Should You Refinance Your Home Loan?
The ideal frequency depends on your objectives. For a family home you do not plan to leave, it is best to look at refinancing at the end of a fixed term.
Conversely, if you are refinancing an investment property to access equity for portfolio growth, it may make sense to refinance at any time, provided another lender accepts your case.
Refinance Your Home Loan In Three Easy steps
Understand The Basics
It can be challenging and difficult to refinance your home loan. To get you one step closer to paying off your loan faster and for less money, check out our refinance guide.
Check Your Savings
To see how much time and money you could save by refinancing, use our straightforward refinance calculator.
Apply For A Refinance
You can schedule an appointment to talk with a Home Loan Experts mortgage broker to see your refinancing options by calling on 1300 889 743 or filling in our free online assessment form. Once we’ve helped you select the loan that best suits your needs, we’ll do all the legwork for you.
When Does It Make Sense To Refinance Your Home Loan During A Fixed Term?
Yes, you can refinance during a fixed term, but you may have to pay break costs. It is generally considered worth it if you can recoup these costs within two years of refinancing.
It is recommended to use a calculator to weigh the costs versus the savings and speak with a broker to assess your full situation.
Case study
The Situation
A few years ago, Ross had some personal problems that resulted in him defaulting on his credit-card payments. Despite the default listed on his credit file, he was able to get approved for a home loan with a non-conforming lender that was able to consider the nature of the default. It helped that he was of a good character and had been making payments on his other financial commitments prior to the default. Ross was approved to borrow 90% of the property value on a $560,000 at a 3-year fixed rate of 5.40%. After making his mortgage repayments on time for three years, Ross wanted to see if he was in a position to refinance to a major lender at a much sharper rate.
Is This The Right Time For Ross?
His fixed period is coming to an end, which means he either has to pay a higher variable rate or refix his loan.
After getting some professional advice from a mortgage broker, he found that it’s better to refinance his loan with a major lender to reduce his mortgage repayments and access equity for investment.
Increase In His Property Value
Fast forward to August 2018, and his fixed term is about to end. Ross’ property value has risen to $650,000 and his loan amount decreased to $480,000 through regular home loan repayments. In effect, this reduced his Loan to Value Ratio (LVR) to 73.84%. Because of he owes less than 80% of the property value and his default has been cleared from his credit, Ross is eligible to be approved by a major lender. He’s also in a position to cash out $60,000 to invest in shares.