Refinancing your home loan can be a great way to get a rate and terms that are more suited to your financial goals or to access equity.
In Australia, you can typically refinance a home loan after purchase at any time and there are no rules against refinancing more than once. But, choosing the best time to refinance a home loan in Sydney can vary based on many factors, including loan types, lender policies and your personal circumstances.
While lenders generally encourage you to wait at least six months to a year after purchasing, other financial and property experts would recommend waiting even longer. Having a longer history with your loan may mean you are offered more favourable rates when you do apply for refinancing.
To make an informed choice regarding refinancing, it’s advisable to consult with a mortgage broker who can analyse your specific requirements and circumstances and guide you on the optimal timing for refinancing your home loan in Sydney.
According to the Australia Bureau of Statistics (ABS), refinancing is at an all-time high with $21.5 billion worth of home loans refinanced in July 2023.
Understanding Home Loan Refinancing
A mortgage refinance involves replacing your current mortgage with a new one from a new lender, often with different terms and rates. While technically you can refinance at any time, it is not recommended you do so without thorough research and investigation. Property owners can choose to refinance for a number of reasons, including:
- Reducing interest rates: Securing a lower interest rate can significantly reduce your monthly repayments.
- Restructuring the loan: Changing the loan structure, such as moving from an interest-only to a principal-and-interest loan, can align better with your financial goals.
- Accessing equity: Using the equity built up on the property can help you fund renovations or the deposit on an investment property.
- Consolidating debt: Consolidating your loans into one can potentially mean a lower overall interest rate.
What to Consider When Refinancing
When people refinance their mortgage, it is generally to save money. But, there are a number of factors you should keep in mind that will influence when you should start refinancing your home loan.
Lender Policies and Loan Terms
Your lender will have its own policies on how soon you can refinance your mortgage after purchasing a property. Some lenders impose a minimum waiting period. The terms of your loan will also dictate mortgage refinance waiting periods.
Loan type
The type of loan you initially took out, such as fixed-rate, variable-rate or split loans, can influence the timeframe for refinancing. A fixed-rate loan may have restrictions and fees if you refinance before the fixed term ends.
Early exit and other fees
Not to be outdone, NAB has predicted that the national market will grow 4.7% this year, with a further 5.0% pencilled in 2024.
As the table below shows, the major bank expects Sydney’s home values to see gains of 6.9% and 4.9% over this year and next.
Impact on Your Budget
Refinancing a home loan costs money, particularly if you do it before your lender’s set period. These fees can be large, so the potential savings from refinancing may not be significant when paying off these fees. Some common upfront costs of refinancing include valuation fees, government fees, legal fees and mortgage registration fees.
Costs from your old lender will include discharge fees and fixed-rate break costs. All of these costs add up so that even if you are getting a more competitive interest rate with your mortgage refinance, you may not be saving money.
Cash Back Deals
In a competitive market, lenders are coming up with new ways to entice customers to choose their products. One of these is a cash back offer, which involves a lender offering a financial incentive to take out a loan with them. This could be in the form of cash as a lump sum once the loan has settled, or deducted from fees.
As a borrower, you can bide your time until a lender has a good cash back deal on the table. You do not have to take the first offer as lenders are always changing and improving on these deals.
You should also be careful of taking the best looking cash back deal without confirming that the rest of the loan terms and rates are suited to your financial needs and goals. When refinancing your home loan, you should be thinking in the long-term to confirm that the fees and costs of the new loan do not outweigh the cashback.
Credit Score
Refinancing home loans can have an impact on your credit score. If you have recently taken out your mortgage, enquiring about refinancing too soon after that can negatively affect your credit score. This may signal that you are desperate for a loan and therefore a risky borrower.
Equity
One of the most important factors to consider before refinancing home loans is how much equity you have in your home. Equity is the difference between the value of your property and how much you owe on the loan.
Generally, a lender will require you to pay lender’s mortgage insurance (LMI) on a loan that has less than 20% equity. This will apply even if you’ve paid LMI to your old lender when you initially took out the loan.
Another concern is the possibility of negative equity, which is when your property value has decreased and you owe more on the property than it is worth. This may affect your options for refinancing.
How to Achieve Your Financial Goals
In order to assess when you should begin the mortgage refinance process, it is helpful if you outline what you are hoping to achieve.
Reducing your monthly payments does not always happen when you refinance a home loan. This is because of the possibility of high fees and charges.
If you are hoping to fund an investment or renovations by accessing your equity, there may be alternatives that better suit you. This can include taking out a construction loan or line of credit. Additionally, the cost of refinancing home loans to access your equity may exceed any financial benefit you could gain from using the equity.
Once you have outlined your main objectives, this will help you decide whether or not the timing is right for a mortgage refinance.
Timing is key
Refinancing a home loan in Sydney is a strategic financial move that can lead to financial benefits. While refinancing can reduce interest rates and consolidate debts, understanding when to refinance is key to maximising benefits. To achieve your objectives, carefully assess your financial position and choose the right moment for financing.
For advice on refinancing a home loan in Sydney, contact Loan Station by filling in this form or emailing us at info@loanstation.com.au.
