Refinancing your home loan to a lower interest rate sounds like a great idea, right? Well, it's not always.
There are a few things you need to consider (and a few calculations you need to make as well) if you're thinking of refinancing.
The advantages of refinancing a home loan
First, let's take a look at some positives.
You can get a lower interest rate: The most common reason to refinance is to get a better interest rate on your home loan than your current lender offers. Easy.
You could increase your loan amount: maybe you want to use your equity to increase your loan amount but your existing lender has turned you down. Refinancing could allow you to borrow more (hopefully for something sensible like a home renovation and not to work on your sweet tan in Bali).
You could access new features: If your existing loan doesn't offer things like an offset account or redraw, it's definitely reasonable to want to refinance so you can get them.
You can lessen your loan term: If you're in a position to do so, you could shorten the length of your loan term if you refinance. Your monthly repayments will go up, but you'll pay the loan off much faster and will save thousands on interest. (But remember: if you're on a variable loan it might be that you can make unlimited extra repayments and pay off the loan early anyway.)
The disadvantages of refinancing a home loan
These may or may not be a problem for you. Check your loan terms, do some maths.
Paying extra fees: Refinancing comes with a cost. For instance, you might have to pay a settlement fee when you leave your lender: if you're in a fixed rate period it's likely you'll need to pay a break fee. You may also need to pay an application fee at the new lender.
Paying more overall: This is where the math gets complicated. Let's say you were 10 years into a 30 year loan term. Refinancing your remaining loan value to another 30 year loan could mean you end up paying more over the life of the loan. Confused? Take a look below at our more detailed explainer.
Lenders Mortgage Insurance: If you're still fairly early into your loan term, you may not have built up a whole heap of equity. So, you may need to pay more in LMI. Which could be really annoying if you already paid it the first time.
Losing equity: Talking of equity... refinancing to access more cash means you'll probably lose some of the equity you've built in your home. It might be a worthwhile risk to take, but you'll need to assess
Example: How refinancing can cost you more in the long run
Let's say you took out an $800,000 home loan 10 years ago on a 30 year term and now you're looking at refinancing. You've found a lower interest rate, but you're still interested in taking out another 30 year term to lower your repayments even more.
-
Original loan
Refinancing after 10 years
Loan value
$800,000
$668,037
Loan term
30 years
30 years
Interest rate
6%
5.50%
Total principal and interest to pay
$1,726,706
$1,365,495
Amount already paid
-
$574,968
Assuming you didn't refinance again and you stayed on the same interest rate, you'd end up paying $1,940,463 over the life of the loan: that's $213,757 more than your original total.
* This is a fictional, but realistic, example.
Now, this might all end up being ok. If you pay above your monthly repayments or keep money in your offset account, you could end up paying off the loan early anyway. (Just make sure there are no sneaky early repayment fees to worry about.)
How much can you save by refinancing in 2024?
We estimate that the average person could save up to $8,484 a year by switching to a lower rate:
The average Australian home loan is now $615,174 (according to the ABS).
Assuming a 30-year loan term, if you switched to that lower rate your monthly repayments would drop from $4,193 to $3,486. That's a saving of $707 every month, or $8,484 a year.
*Data is correct as of 08 April 2024. This savings example is a hypothetical estimate only and uses rates across Finder's database.
Market update by Rebecca Pike – Finder's senior home loans writer
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Your home loan refinance questions answered
You can refinance a fixed rate home loan, but you have to pay a break fee for exiting the loan early during the fixed period. If you are close to the end of the fixed period on your loan, then this fee will be smaller, but if you have a few years left, it could cost thousands. Your current lender can provide you with a break cost estimate to help you decide if the cost is worth it.
Theoretically, you can refinance your loan no matter how much or how little equity you have. But if your equity is under 20% of your remaining loan amount, then refinancing, while possible, gets expensive. This is because your new lender will charge LMI if your equity is below 20%.
It can take 2–4 weeks to get your new loan application approved and the old loan discharged. But it varies widely and depends on your new lender and your old one.
Many online lenders (and even some of the banks) now offer fast digital applications. And it's usually easier for refinancers to get loans approved because they have built up equity and have a track record (hopefully!) of making regular loan repayments.
You can refinance as often as you like, but given the time involved and the cost of registering a mortgage, it doesn't make sense to switch frequently. You're better off finding a good deal that will hopefully remain a good deal for a few years. If your rate creeps up and you find better options, then it's time to ask your lender for a discount. And if that doesn't work, then you should switch.
Yes. You can switch to a better loan with your current lender. Or you may be converting a property from your residence into an investment property. In this case you'd need to refinance your home loan to an investment loan.
Rebecca Pike is Finder's senior writer for money. She joined Finder after almost four years writing for business publications in the mortgage and finance industry, including three years as editor of Mortgage Professional Australia. She regularly appears as a money expert on programs like Sunrise and Today, as well as across radio and newspapers. She also holds ASIC-recognised certifications in Tier 1 Generic Knowledge and Tier 2 General Advice Deposit Products.
Home loan cashback deals can help you refinance to a cheaper interest rate and get a lump sum cash payment. Compare the latest deals and check your eligibility today.
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