Should I refinance my home loan now?

Why refinance now?

• Interest rates have never been lower, meaning your current loan could be more expensive than other options.
• You can lock in a cheap fixed-rate mortgage and get repayment security.
• There's even a chance to score some cashback when you refinance.

Sounds like a winner, right? For many borrowers, refinancing is a sure-fire strategy to start saving money and paying less for your mortgage. But you need to look at your financial situation and loan before you dive in, to make sure you don't pay more in fees than you stand to save.

Here's how to work out if you should refinance your home loan. But first, consider the reasons why you want to refinance in the first place.

Top reasons to refinance

1. To finance a property renovation
2. To get a cheaper interest rate
3. To get a new loan that saves you money with features like an offset account
4. To consolidate personal debts, credit cards and car loans into one home loan
5. To access equity to buy another property, such as an investment property
6. To access some equity for another reason, such as a holiday

With a clear goal in mind, you can get started on the process of getting a better deal and saving money on your mortgage.

Step 1: Start with your home loan interest rate

How much are you currently paying for your home loan? If your interest rate is above 3%, you're probably paying too much – and switching to a cheaper home loan has the potential to save you a lot of money.

Here's a quick example:

• Your current loan amount: $500,000
• Current interest rate: 3.25%
• Current monthly repayment: $2,176
• New interest rate: 2.59%
• New monthly repayment: $1,999

In this example, refinancing to a cheaper home loan rate saves you $177 per month.

That's $2,124 per year back in your pocket, rather than the banks'.

Find out how much your current interest rate is and use it as a point of reference.

Compare rates and learn how to refinance

Finder survey: How many Australians think they'll refinance again within the next 2 years?

Step 2: Check if you have a fixed rate loan

Let's say your mortgage is locked into an older fixed rate and now it's looking very high compared to better options on the market. You may be able to refinance to a new, lower rate – but first, you need to check what the cost of breaking your fixed rate loan will be.

To do this, contact your bank. As them for a break fee figure, if you leave your loan today. They'll quote you a figure that is valid for that day only, as the amount changes day by day, based on how much it costs the bank to "lose" your business for the remainder of the fixed period.

Generally, the factors that impact your fixed loan break fee include:

• The time period left on your loan, for example 12 months remaining out of 3 years
• The interest rate – the bigger the difference between your rate and the current rate it offers new customers, the bigger the fee to break the loan contract
• Your loan amount – again, the greater the loan amount, the bigger the fee is likely to be

The break fee can be high and if that's the case then it might outweigh the benefits of refinancing to a cheaper loan. Keep in mind that a cashback home loan offer could help to offset at least part of the break fee, so don't make any hard and fast decisions until you know exactly what numbers you're working with.

If it turns out that the break fee is too high and now is not the right time to refinance then make a note in your calendar for a month before the loan expires, so you can compare for a better home loan deal then.

If you don't have a fixed rate, you have the flexibility to move to a new loan without financial penalty. You may want to consider a fixed rate product: rates are very, very low right now (in many cases, even lower than variable rates) so the reduction in your monthly mortgage repayment could be substantial.

Learn how fixed rate breaking costs are calculated

Step 3: Contact your current lender to negotiate first

If you've checked your rate, made sure the break fees aren't too high and you're ready to refinance, there's one step to take before you shop for a better deal. And that is: contact your current bank.

Before you refinance to a new lender, see if you can negotiate with your current lender to refinance your mortgage to a lower rate. If you want to get your hands on some more money, you may even be able to access more equity with a home loan top-up. This allows you to borrow a little more from your equity with your current lender and make your home loan slightly bigger.

If it's just a better rate you want (and you're not seeking to borrow more money), ask to speak to their retention team. Tell them:

• You're a customer of XX years
• You want to know if they are able to negotiate on their advertised interest rates
• If they can't offer a better deal, you'll be shopping around for a new loan

They have teams in place to handle these exact conversations, so don't be intimidated or hesitant to ask. Their entire job is to stop you from leaving, and they often have the discretion to offer you a discount to entice you to stay.

A tip to make your argument for a discount even stronger? See what rate they charge new customers and compare it to what you're paying. Research from the ACCC at the end of 2020 found there can be a difference of up to 0.58% between the rates banks and lenders charge new and existing customers, with cheaper rates offered to newbies to snag their business.

In some cases, they may be able to reduce your variable interest rate over the phone. Other times, they'll request a day or two to come back to you.

Or, there are times when your bank simply won't negotiate a better deal with you – if, for instance, you have a patchy repayment history, or if your home loan balance is quite high in comparison to your property value. This is because they know, to a degree, that they have you captive: customers with less than 20% equity have to pay lenders mortgage insurance again to switch lenders. Often, this is prohibitively expensive.

Once you have an outcome from this conversation, positive or negative, proceed to step 4.

Step 4: Check out the savings you could make by refinancing

Now, it's time to make a choice: stay with your current lender or refinance to a brand new bank?

To be armed with all the information you need to make the best possible decision, it's time to compare current home loan offers for refinancing. Is there a loan available that's even cheaper or more suitable than your current loan?

You can work this out by plugging your current loan details (amount and interest rate) into the calculator at the top of this page. In the table below, you'll see how much you could save by switching to any of the listed products.

For instance, we ran a hypothetical example of a current loan of $680,000, at 2.79%, for 30 years. The savings (over the life of the loan) in the table of home loan options ranged from $8,000 to $130,000!

To help make your decision, you also need to ask your current lender for a quote on how much it will cost to actually switch. Some of the fees they may charge can include things like:

• Discharge fees with your current lender
• Early exit fees with your current lender, including the personalised break fee for fixed rate loans
• Application fees with the new lender, which can range from absolutely nothing to up to $700
• Settlement fees with the new lender
• Valuation fees with the new lender, generally $200-$300 (sometimes the lender pays these fees for you)
• Government mortgage discharge fees, usually between $175 and $325
• Lenders mortgage insurance premium, if your equity is less than 20%

Use our switching cost calculator to estimate your refinancing costs, but confirm directly with your lender. All up, these fees can add up to around $1,000; it sounds like a lot, but this can pale in comparison to the amount you'll save by switching to a new lower-rate loan (and a cashback offer can also help offset some of these fees).

Learn more about the refinancing process and how to switch loans

Step 5: Pull the trigger on your home loan decision

Whether you decide to stay with your current lender or move to a new bank, it's time to make your decision. If you decide to stay put, make a note in your calendar to check it again in 12 months.

Otherwise, contact your new lender and get the ball rolling. The process of refinancing generally takes a few weeks, though it can be longer during busy periods, and if you apply for a cashback deal, you'll receive those funds a couple of weeks after your new loan settles.

You can compare current competitive home loans for refinancing in the table below and simply click through to the loan you're interested in.

But first: When is the wrong time to refinance?

Be aware that if your equity or loan-to-value ratio (LVR) is above 80%, you'll have to pay lenders mortgage insurance if you switch lenders, which can make refinancing very expensive.

Dominique Bergel Grant, founder of Leapfrog Finance, says there are other factors that may impact your ability to refinance.

"If you have a loss of income or you're faced with unexpected expenses, these factors may inhibit your borrowing capacity and your serviceability potential. As a result, you may not feel confident refinancing your mortgage during such a time of uncertainty," Bergel Grant says.

"Also, if you anticipate a significant lifestyle change, such as if you're planning a renovation or thinking of starting a family, this can impact your ability to get a loan."

In this instance, you might want to refinance as soon as possible, to lock in your new, cheaper loan before your income situation changes.

The same is true if you're planning to change your job in the near future. Most lenders prefer borrowers to have been in the same job for the past 12 months, as it indicates a reliable and steady income source, so get the ball rolling on your refinance before any career changes (especially if you move into an entirely new field).

Finally, if your credit record has worsened since getting your original home loan, new lenders may charge you more interest or you may have trouble gaining loan approval.

Looking to refinance? Compare your options now

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