When is the right time for mortgage refinancing, and what are the major things to consider?
July 15, 2024Your mortgage is a significant financial commitment that typically lasts 25 to 30 years; to ensure you always have the best loan throughout this extensive period, it is recommended you regularly review your mortgage.
If you can secure a new loan with lower interest rates or features that better suit your needs and goals, it may be worth refinancing.
Refinancing is when you replace your existing mortgage with another home loan, a move that is recommended every few years – or at least when interest rates, or your needs and financial capabilities, have changed significantly.
Refinancing also allows you to gain access to any equity you may have in your existing loan.
External vs internal refinancing
External refinancing
External refinancing means switching your mortgage to a new lender; you pay off your current mortgage and take out a new one with a different lender.
Possible advantages
- Better interest rates : You may get a lower rate with a new lender
- Improved loan features: Other lenders may offer better features, like offset accounts or flexible repayments
- Better service: If you’re not happy with your current lender’s service, switching can improve your experience
Possible disadvantages
- Fees: You may have to pay discharge or break fees to your current lender and set-up fees to the new lender
- Time and effort: The process involves a new mortgage application, credit check and property valuation. You will need to submit the same documentation you would for a new loan application as well as the statements on the loan you are refinancing and details of the home to be refinanced
- Approval criteria: Another lender’s approval criteria could be different, or stricter, than your current lender’s
Internal refinancing
Internal refinancing means staying with your current lender but switching to a different mortgage product, negotiating a better interest rate or changing your loan term.
Possible advantages
- Lower fees: Usually, there are fewer fees because you’re staying with the same lender
- Simpler process: The process is often quicker and easier since your lender already has your information
- Loyalty benefits: Your current lender might offer better deals to keep you as a customer
Possible disadvantages
- Limited options: You can only choose from the products your current lender offers
- Possibly higher rates: You might miss out on better rates from other lenders
- Need to negotiate: You might have to negotiate with your lender to get a better deal, which can be difficult
To decide which option is best for you, compare the costs and benefits of each. Talking to a reputable mortgage broker like Loan Station can help you make the right choice.
When to consider refinancing
The ‘right time’ can depend on both environmental/economic and personal factors. But here are some circumstances in which refinancing could be a good idea:
Interest rates are lower
If the Reserve Bank of Australia (RBA) cuts the official cash rate, lenders usually lower their interest rates too. By refinancing during such periods, you may get a better rate.
Your credit score has improved
If your credit score is higher than it was when you took out your original mortgage, you may qualify for a lower interest rate.
Your fixed-rate period is ending
If you are coming to the end of your fixed-rate period, you may find that the new variable rate is higher than current rates. Refinancing can help you lock in a new fixed rate or find a better variable rate.
Your property’s value has increased
If your property value has gone up significantly, you may have more equity. This can help you get a better deal on a new home loan or avoid lender’s mortgage insurance (LMI) if you now have more than 20% equity.
Economic conditions are good
Low inflation and steady employment rates can lead to lower interest rates; keeping an eye on economic news can help you decide when to refinance.
Better loan products are available
Lenders often update their loan products to be more competitive. New features like offset accounts, redraw facilities or lower fees can make refinancing beneficial.
You want to consolidate debt
If you have multiple high-interest debts, consolidating them into a refinanced mortgage can possibly lower your overall interest costs and fees, and simplify your repayments.
Your personal circumstances have changed
If you have had a change in employment, a rise in income or major expenses like renovations or education, refinancing can help you find a loan to better suit your new needs.
Promotional rates are ending
Some lenders offer introductory rates that end after a while. When these do, it can be a good time to look for a better deal.
Things to consider before refinancing
- Refinancing every few years can help ensure you maintain a competitive home loan rate as financial circumstances evolve
- Refinancing may briefly affect your credit score, but diligent repayment on the new loan can lead to improved credit over time
- While there’s no limit on the number of times you can refinance, lenders often enforce a ‘seasoning’ period of around six months before refinancing again. This ensures a solid payment history before considering new terms
- Refinancing can be beneficial if your financial situation changes or if you find a better rate
- Understand the costs associated with refinancing, such as fees and potential impact on your interest rate, to ensure that the savings outweigh these expenses.
The costs of refinancing
Refinancing can save you a lot of money through lower interest rates or adjusted loan terms, but it is not free; you will generally be required to pay fees to end your existing loan and initiate your new loan.
It is advisable to weigh up the costs with their potential savings.
Ending your current loan
Discharge settlement fee
Cost: $150 to $600 (but can go up to $1,000)
Break costs for fixed-rate loans
Cost: Depends on a few factors, including how much of your loan you have repaid; your fixed interest rate; the lender’s current interest rate offering; and your remaining loan term.
Initiating your new loan
Application/establishment fee
Cost: Up to $900
Settlement fee
Cost: $100 to $900
Mortgage registration fee
Cost: $100 to $250
Property valuation fee
Cost: $200 to $600 (but can go up to $2,000)
Lender’s mortgage insurance
Cost: Based on your property’s value and loan amount but can range from thousands to tens of thousands of dollars
How much money you can save
The amount you can save by refinancing your mortgage can be significant, especially if you are getting a lower interest rate.
Example:
Current loan
- Outstanding loan amount: $800,000
- Remaining loan term: 25 years
- Current interest rate: 6.27%
- Monthly repayment: $5,287
- Total repayment: $1,586,175
New loan
- Outstanding loan amount: $800,000
- Remaining loan term: 25 years
- New interest rate: 5.79%
- Monthly repayment: $5,052
- Total repayment: $1,515,662
By refinancing your loan at a lower interest rate, you will:
- Save $235 a month
- Save $70,513 over the full term
Is refinancing worth it?
Before you make a decision, it is a good idea to:
- Compare offers: Use comparison websites and consult with a reputable mortgage broker to understand the best available rates and terms
- Calculate costs: Factor in exit fees from your current loan (if applicable) and establishment fees for the new loan to ensure refinancing makes sense
- Review your financial situation: Ensure you have stable income and good financial health, as refinancing involves undergoing a new credit assessment
If you are not sure whether mortgage refinance is a wise choice – or if the time is right – Loan Station can help you assess your situation and weigh-up the advantages and disadvantages. We can also help you apply for a refinance mortgage and compare multiple offers to secure you a competitive deal.
Contact us on 1300 46 46 11 or book a free consultation with one of our expert mortgage brokers.