When should I refinance? The answer is not as straightforward as it seems.
The most common reason for switching to another lender is to get a lower interest rate but there are several other benefits and drawbacks that you need to consider before making this big decision.
When do most homeowners decide to refinance?
People usually consider refinancing their home loan when they are coming to the end of their fixed rate term.
Most people consider refinancing their mortgage every 3 to 4 years even if they’re on a variable rate.
Over that time, you will have reduced your loan balance and your property value will hopefully have increased over that time.
This puts you in a strong position to shop around with other lenders and look for a better interest rate or a more flexible product.
Another common reason to refinance is if your current lender is reluctant in releasing equity to you for the purposes of buying an investment property.
Call us on 1300 889 743 or fill in our free assessment form to start your home loan refinance journey today.
Am I eligible to refinance?
- You owe less than 80% of the property value: Ideally, you should owe less than 80% on your mortgage, otherwise, you may have to pay thousands in Lenders Mortgage Insurance (LMI).
- You are on a variable rate: It’s possible to refinance every 6 months but be aware that you’ll add an enquiry to your credit file every time you submit a new application.
- You can refinance from a low doc to a full doc: If you had a low doc mortgage but now have sufficient income evidence, you may qualify for a standard home loan at a sharper interest rate.
- You can refinance out of a bad credit loan: You can refinance a bad credit home loan back to a major lender if your Loan to Value Ratio (LVR) is 80% or less and the black marks are no longer showing on your credit file.
How often should I refinance my home loan?
It depends on your overall financial circumstances and your objectives.
If it’s your family home and you don’t plan to move anytime soon, you generally only want to look at refinancing at the end of your fixed term.
If you’re on a variable rate, it’s possible to refinance at any time, which typically makes sense when refinancing an investment property and you want to access equity to grow your portfolio.
For example, you may have only settled your mortgage in the last 3 months but recently found an investment opportunity and want to use your equity to purchase the property.
Your current lender may not allow you to do this but another lender may be able to consider your case.
Call us on 1300 889 743 or complete our online enquiry form and speak to the experts in home equity loans.
When it makes sense to refinance during a fixed term
Yes, you can refinance your mortgage during your fixed loan term.
You may have to pay break costs and early exit fees but, if you recoup these costs within 2 years of refinancing, it may be worth it.
The refinancing calculator can give you a pretty good guide on the costs versus savings of refinancing.
It will calculate how much your monthly payment will change and how long it will take to recoup any fees and break costs.
Of course, it’s recommended that you speak with an experienced mortgage broker so they can assess your financial situation in full.
A few years ago, Ross had some personal problems which resulted in him defaulting on his credit card payments.
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 3 years, Ross wanted to see if he was in a position to refinance back to a major lender at a much sharper rate.
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.
Is this the right time for him?
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.
Are there any alternatives to refinancing?
Refinancing your home loan can be costly and can take time if you’re switching lenders.
However, there are alternatives if you find that it isn’t the right time for you to refinance.
Negotiate with your bank
For example, if your objective is to lower your interest repayments, you could call your lender and check if you can negotiate a lower interest rate or have your repayments fixed for a specific time.
Extend your loan term
Also, you might want to consider extending your loan term, which can also reduce your mortgage repayments.
For example, instead of repaying your home loan over the remaining 27 years of your loan term, your bank may allow you to extend the term to a maximum of 30 years.
Switch to interest only
Temporarily switching to interest only from principal and interest repayments may be another option for some borrowers, especially those taking parental leave.
Like extending your loan term, switching to interest only helps to reduce your repayments and frees up your cash flow to pay down higher interest debts or to build up your offset account, giving yourself a buffer against interest rate rises.
The added benefit of an offset facility is that you can access these funds easily if and when you need them.
Keep in mind that both of these options should only be considered as short-term solutions because they can make your mortgage more expensive over the long-term.
Not sure whether it’s the right time to refinance?
We can help you run the numbers and check if refinancing makes sense for you and check out the home loan refinance guide for more golden tips.
The refinance checklist will help you ensure you have all the required documents needed to start your refinance application.
Call us on 1300 889 743 or fill in our free assessment form to speak with one of our home loan refinance specialists today.