When to Refinance a Home Loan… and When You Shouldn’t!
You notice some newly advertised home loan rates better than your own.
You wonder… why am I stuck with my old rate? Perhaps I deserve better?
If this is you, you might want to consider refinancing your mortgage. There are many situations where it could make sense to switch your rate, so let’s go right ahead!
What is refinancing?
Refinancing your home loan means trading in your existing loan for a new one. You can refinance your mortgage with any bank or lender, and it does not have to be your existing lender.
Essentially, what you are trying to do is get a better deal for yourself. You just need to make sure it really is a better deal.
How often should you be refinancing?
While there may not be a definite rule as to how often or when you should refinance your home loan, the typical Aussie borrower will likely change their loan every 4-5 years. Determining how often you should be refinancing a mortgage is different for everyone.
How often you refinance is be based on several factors, including:
- Lifestyle changes and new financial goals
- Changes to the RBA cash rate and/or lender rates
- If your fixed rate is coming to an end
- If the total benefits of a new rate outweigh the costs involved
If you are wondering how long it takes, a mortgage refinance will generally take about four to six weeks.
Why would you refinance a home loan?
While there are many reasons why someone might want to refinance their current loan, the main two reasons are either: to get a better rate or to cash in on some home equity.
A lot can happen during the life of your mortgage. Market conditions could change drastically, new rates pop up, and you might have a couple of serious lifestyle changes in between. Because it is such a large investment, there are a variety of reasons why refinancing might be worth it. It all depends on your personal and financial circumstances.
You could save yourself a lot of money. However, you need to be aware of the pros and cons of refinancing to determine if making the switch is worth it.
What are the benefits of refinancing?
Your needs change and your mortgage can too
Your lifestyle may have changed considerably since you first took out a loan – perhaps you’ve changed jobs or have started a family. If you think your current deal is no longer suitable, it may be a good idea to switch. You could reduce your monthly repayments with a new loan with a lower rate.
Take advantage of home equity
Your home equity is the market value of your property. If the value of your property has noticeably increased in recent years, you could be able to refinance the current rate and shave some money off repayments. Lenders are more likely to offer you a better rate if you’ve got more equity. Potentially, there is even the option to refinance your loan and use equity for renovations or other investments.
Switching to a fixed rate
If you are on a variable rate or your current fixed rate is coming to an end, you may decide the later suits you better. With a fixed rate home loan, you have peace of mind knowing your payments will remain the same during the fixed term. You may lose out on the flexibility of a variable rate, but you are better protected against market changes and rate hikes, and therefore have an easier time sticking to your budget.
Consolidate multiple debts
Many people choose to refinance to consolidate their debts. Debt consolidation can be a good idea when you have a lot of credit cards and other debts such as a car loan. Essentially, you will be combining the money you owe into one new loan that will be used to pay off your debts. Just make sure that you will be better off if you do consolidate.
Save money in the long run
If your home loan is a few years old, there is the likely chance that a refinance could save you some money. There are many variables involved but it is always helpful to be proactive about it, you could always talk to a mortgage broker to work out what is right for you.
What are the downsides of refinancing?
Refinancing expenses and costs
Depending on when you are trying to refinance, some lenders could charge you some costly fees to switch mortgages. These closing costs could set you back in the long run if you are not careful. You should also be aware of the extra fees involved in a refinance. After all, you are going through the home loan process once again. Make sure you do your research and compare whether the refinance is worth the costs, or, get a broker to do the hard work for you.
Change in home loan appraisal
Your home equity is a double-edged sword. What can be a benefit of refinancing can also be a downside. Part of the costs involved in a refinance will be a new home loan appraisal. If the appraisal finds the property’s value well below the original, you may be in hot water. In cases like this, it may be better to postpone your refinance.
New application denied
Having a current mortgage does not guarantee you an easy refinance. If there are any significant changes to your income or debts since you last applied, you could face some hurdles. In the unfortunate case that things are worse off, you may face difficulties when trying to get your refinance approved. Lender scrutiny is already high and if you are trying to be approved for a better rate, please do your research and make sure you are ready.
Helpful read: Tips for home loan eligibility and getting approval
The bottom line
Before you make any hasty decisions, consider this advice.
Your Refinance checklist
- Do your research. Be aware of your current rate and determine whether the new interest rate really is better.
- Consider the longer term. It may seem like a deal you can’t pass up, but think about where the greater market is heading, and if and how your lifestyle is changing
- Compare the pros and cons. Seriously, will the costs saved really outweigh the costs involved?
- Make your decision with care. We all like to be cautious when making big decisions. Seek professional advice if you need clarity.
Are you unhappy with your current rate?
Are you feeling lender loveless? Is your lender looking after you?
We could help you get a couple thousands dollars cashback when you refinance.
Speak with one of our mortgage brokers and we can work out if you are still getting a good deal. It’s free, with no obligations attached. Seriously. If you would like to get free help on refinancing, contact us today.
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