When to refinance your mortgage

With Interest Rates on the rise those with a mortgage should be asking do I have the best loans for our current situation?  The answer may mean that you should consider refinancing, but not sure when to refinance?

Refinancing can help you save money and could also give you access to useful features like a redraw facility or offset account. But there’s more to refinancing than simply looking at the advertised interest rate of a new home loan offer. You need to work out if refinancing is worth it, as there are costs associated with switching. There’s also the crucial point of timing and working out when the right time is to refinance.

What is refinancing a home loan?

Refinancing is another way of saying that you’re changing your existing mortgage or home loan to another provider. You may also hear or read about people switching, which is exactly the same thing.

Refinancing is another way of saying that you’re changing your existing mortgage or home loan to another provider.

You can also refinance your home loan with your current lender and simply move to another product they offer.

How to know when it’s the right time to refinance – signs to look out for

In terms of knowing when is the right time to refinance, this can depend on a number of factors including your circumstances. Here are some of the most common reasons people switch:

Get a better interest rate

If you have been with the same provider for a number of years, chances are there are better deals on interest rates out there. There are often offers for new customers, or interest rates may have come down since you signed up (or now may be moving up). This will help you save with lower monthly repayments.

You buy a new home

If you have just bought a new home, it often makes sense to take out a new loan when you make the move. There could be more attractive deals for you to take advantage of, and save with a lower interest rate or additional features.

Use new home loan features

If you’re on a fairly basic, ‘no-frills’ home loan, you may want to access more useful features like an offset account or redraw facility. These can not only help you repay your home loan sooner, but could also suit your current personal financial needs better.

Change the loan term

You also may want to explore how switching to a loan with a shorter loan term could benefit you. If you’ve increased your income, you may have the ability to put toward your repayments. You could also opt for a longer loan term if you want to reduce your repayments, though this will mean you pay more in interest.

Access equity in your home

If you’ve been able to repay a substantial portion of the principal part of your home loan, refinancing can help you access these funds. This is called the equity in your home, which is  the difference between your property’s value and the amount you still owe on your property. This could fund a major renovation to your home or be used to purchase an additional property.

Consolidate your debts

If you have accumulated a range of debts alongside your current home loan, you can consolidate all these into a new mortgage. This could save you money and make it easier to manage your finances.

Let’s now look at timing, and when you can refinance a home loan.

How long should you wait before you should refinance?

You’re able to refinance at any time, though there is little benefit to switching your mortgage until you have had it for a year or two.

Why?

The reason is simple. There are costs when refinancing a mortgage and applying for a new one. This is why some people approach their current lender first, in the hope of getting a better deal. If you have a fixed rate home loan, break costs can be quite high, so it makes sense to wait until this period is over. There are also fees attached to a new home loan, like loan establishment or application fees, which all add up.

There are costs when refinancing a mortgage and applying for a new one.

You also need to calculate if refinancing means you will have to pay lenders mortgage insurance (LMI). This means you need to have 20% equity in your current property, or you will have to pay the LMI premium. If this applies to you, calculate if it is worth the additional cost of LMI.

How often can you refinance?

You can refinance as often as you want, though as we have detailed here, it often doesn’t make financial sense to do this too early, or too often, purely from a cost perspective. Your financial circumstances will also play a part in determining if switching home loan providers make sense for you.

Does it make sense for me to refinance?

Take a close look at your finances and ask yourself these questions before you make the call to refinance:

• How much of my home loan is paid off? If you have paid a good portion of your home loan paid off you are likely to have equity in your home, which gives you more options when it comes to switching. This includes renovating your current home or using the equity to purchase an additional investment property.
• What’s my current interest rate? Identify what interest rate applies to your current home loan so you know how advertised rates compare. You need to look at the comparison rate, which includes the interest rate and most fees.‍
• Will you actually save money by switching mortgages? Here you need to do your maths and factor in all the costs associated with switching–including leaving your current lender and applying for a new loan.

Let’s now look at some alternatives to refinancing.

Are there any alternatives to refinancing?

If you have worked out that refinancing doesn’t make financial sense for you, there are some other options to consider.

The most obvious thing is to ask your current lender for a lower interest rate. Chances are they want to keep your business and could match what they are offering new customers. If you want to renovate your home you’re also able to opt for a mortgage top up, which allows you to use the equity in your property to increase your home loan.

You can always ask your current lender for a lower interest rate.

You may also be able to improve your finances by switching from principal and interest repayments to interest only, or by moving from a variable rate to a fixed interest rate loan.

Ready to refinance? Here are the next steps to take to start the process.

What steps should I take if I want to refinance?

If you’re financing with your current lender, you will still need to apply for the new loan, though with less supporting documentation.

If you’re switching to a new provider, you will to provide all supporting documentation, including confirming your personal identification, proof of income, assets and liabilities, and records of recent bank statements. The lender will then conduct a valuation of the property you want to purchase and assess your application. Once approved, they will send you the loan documents to sign and arrange for your existing loan to be discharged and paid out.

You should now have a good idea of what happens when you refinance a home loan, and be able to make an informed decision based on your personal circumstances. Remember, whether you should refinance your home is dependent on a multitude of factors, so take the time to work out if it’s the right decision for you and your property.

If you would like some information about mortgage brokers that we know and trust, call any of the team at Hicks Real Estate and we can point you in the right direction.

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