Refinancing a mortgage can be a game-changer for homeowners looking to optimise their financial health; this process involves replacing your current home loan with a new one, often with better terms and conditions.
According to PEXA, 452,025 home loans across the country’s five mainland states were refinanced in 2023; in the March 2024 quarter, 81,614 refinances were completed.
Whether you want to reduce your monthly payments, access home equity or secure a lower interest rate, refinancing can offer significant advantages that align with your evolving financial needs and goals.
It is, however, important that you not only understand when and why to refinance, but the benefits and potential drawbacks.
5 top reasons to consider refinancing
Changes in the interest rate environment, improvements in your credit score or shifts in your financial circumstances can all signal the right time to consider refinancing.
Here are the six most common reasons homeowners choose to refinance their home loans:
- To secure a lower interest rate
If your home’s value has increased and your loan amount has decreased, your loan-to-value ratio may have dropped, helping you secure a lower rate. Alternatively, another lender may be offering lower rates.
In low-interest environments or when rates are rising, refinancing also allows you to fix your home loan at current rates.
- To access money for an emergency or big-spend
Refinancing can give you access to home equity you have built. The longer you have been paying off your mortgage, the higher your equity is likely to be.
- To change lenders or loan terms
By refinancing your loan, you can extend or shorten your repayment term; switch between variable- and fixed-rate loans; or move between principal-and-interest and interest-only payments.
Furthermore, another lender may offer better service levels and/or additional mortgage features such as flexible repayment options, redraw facilities, an offset account and/or better loan terms.
- To consolidate debt
Refinancing allows you to consolidate other debts into your home loan. The benefits of debt consolidation include fewer repayments each month; one interest rate and set of loan fees for the debts consolidated; simpler budget management; and potentially lower repayments as interest rates on home loans are usually lower than other loan types.
- To benefit from improved financial circumstances
If your financial situation has changed for the better – such as an improved credit score, higher income and reduced expenses – you may be able to secure a loan with a lower interest rate or more suitable loan terms.
Step-by-step guide to refinancing
1. Decide why you want to refinance
Do you want to lower your monthly payments, pay off your loan quicker, get cash from your home’s value, consolidate debts or change your loan terms and structure?
2. Understand the costs involved
There are several fees you may need to pay, including discharge fees, application fees and valuation fees. Compare these costs to how much money you could save with a new loan.
3. Check your home equity
Calculate your equity by subtracting what you still owe on your mortgage from your home’s current value. To avoid extra insurance costs, borrowers are usually required to have at least 20% equity.
4. Apply for the new loan
Work with a mortgage broker to prepare your refinancing application and apply for the new loan.
5. Compare offers from different lenders
Your mortgage broker can help you look for the most competitive loan offers by comparing their interest rates, loan terms and any special offers or product benefits.
6. Settle your new loan
Work with both your old and new lenders to finalise the switch; your new lender will pay off your old loan, and your new loan will start. Your mortgage broker can assist with this process.
When refinancing may not be a good idea
1. You have to pay penalties
If your current loan carries hefty penalties for paying it off early – known as break fees – refinancing will only make financial sense if savings from the new interest rate outweigh these costs.
2. You have low or negative equity
If you do not have sufficient equity in your loan, you may need to pay lender’s mortgage insurance (LMI); if the outstanding balance on your loan exceeds the value of your property – known as negative equity – refinancing could be difficult or not possible.
3.Your credit score is poor
If your credit score has dropped since you took out your original mortgage, you might not qualify for a lower rate when refinancing.
4. Your income is unstable
If your income has dropped or is less stable since taking out your home loan, lenders may not approve a new loan.
5. There are high lender fees
You may be liable for fees on your current and new loan. Costs associated with refinancing include application fees, valuation fees and legal fees. If these are too high, it may outweigh potential savings from a lower interest rate.
6. You are near the end of your loan term
If you’re close to paying off your mortgage, you could end up paying more in fees than you would save in interest over the remaining loan term.
Maximise benefits, minimise negatives: Top tips
- Secure a lower interest rate by refinancing when rates are favourable or expected to rise
- Carefully evaluate and access equity for purposes like debt consolidation or home improvements
- Customise loan terms to align with current financial needs, such as adjusting repayment structures or switching between fixed and variable rates
- Consolidate high-interest debts into your mortgage to simplify finances and potentially reduce overall interest payments
- Refinance when financial circumstances improve, such as higher income or a better credit score, to qualify for better loan terms
- Understand and compare all costs involved, including fees like discharge and application fees, to ensure savings outweigh expenses
- Avoid refinancing shortly after purchasing a property to minimise upfront costs relative to potential financial benefits
- Maintain a strong credit score to qualify for lower interest rates when refinancing
- Ensure sufficient equity to avoid additional costs like LMI and consider stability of income when applying for refinancing
- Assess the remaining loan term and potential penalties for early payoff to determine if refinancing is financially advantageous
Making informed decisions
Refinancing your mortgage can be a strategic move to secure a lower interest rate, access home equity or adjust your loan terms to better suit your needs. However, it’s essential to weigh the potential benefits against the drawbacks.
By considering factors like equity, credit score and overall costs, refinancing can provide significant financial advantages; as the recent increase in refinancing activity indicates, many homeowners are finding it a valuable tool in managing their finances effectively.
To potentially improve your financial well-being through refinancing, contact Loan Station today on 1300 46 46 11 for expert advice and help navigating the process.