The market's competitive and rates are low. If you haven’t been paying attention to your home loan, it’s time to give it a check-up.
As the home loan market becomes more and more competitive, it’s hard to miss the constant calls to refinance. And if you do have a home loan, it’s probably wise advice.
Recent research at finder found that switching to a home loan below the average market-wide interest rate could save you up to $69,283.57 over a 30 year loan.
But refinancing isn’t always the best option. If you’ve been in your current home loan only a short time, the costs of refinancing could well outweigh the benefits.
So how often should you refinance your home loan? The answer all depends on the market.
1. Do a health check
It may be frustrating to hear, but there’s no hard and fast rule regarding how often you should refinance. However, as a general rule of thumb, it’s good to do regular home loan health checks.
There are a few times when it makes sense to have a look at your home loan, including:
- When the RBA moves rates
- During the spring selling season
- When regulators change rules regarding lending
- At least once every 18 months
Even outside events like these you should check your home loan rate against other rates in the market at least every year to year-and-a-half. You might be surprised by how much rates have moved since you first took out your home loan.
2. Check the cost of switching
If you’ve performed a health check on your home loan and determined that there are better rates available, you’ll want to weigh the cost of switching to see if you’ll end up saving money.
Refinancing a home loan can come with a variety of costs. You’ll likely have to pay a discharge fee to close out your old home loan account. You may also have to pay application and settlement fees for your new home loan.
If you had a small deposit when you initially took out your home loan, it’s likely you also paid for lenders mortgage insurance, or LMI. This insurance premium is charged when you have a deposit of less than 20%. If you haven’t been paying your home loan long, it’s possible you haven’t built up 20% of equity in your home. If this is the case, you could have to pay LMI a second time if you refinance, and this could cost you thousands.
Moreover, if you’re in a fixed rate home loan, you’ll likely have to pay a break cost to exit the home loan before the end of the fixed period. Depending on how long you have left in the fixed period and how much rates have moved since you first took out your home loan, this break cost could be thousands of dollars.
If the costs of switching are too burdensome, they could well outweigh the benefits and you could be better off staying with your current home loan. You can check the potential cost or savings you could see from refinancing with this calculator.
3. Look at the features
Another factor to consider when deciding whether to refinance is the features your home loan has versus the features you’d like.
One useful feature is an offset account. An offset account is a transaction account linked to your home loan that reduces the amount of interest you pay. It does this by offsetting the amount of money on which interest is charged by the amount of funds in the offset account. For instance, if you have a $750,000 home loan with $50,000 in a linked offset account, you’ll only be charged interest on $700,000.
Another helpful feature is a redraw facility. This account allows you to withdraw any extra funds you’ve paid on your home loan. If you’ve paid a month or two ahead on your home loan and need to access the funds for another purpose, a redraw facility will allow you to get access to that money.
If your current home loan doesn’t have these features, you might want to consider refinancing to a loan that does. However, be aware that features like these often come with fees or slightly higher rates than loans that lack these features. Make sure to weigh whether you’re likely to use these features before paying for them.
4. Think about fixing
If you’re looking into refinancing, you might want to consider fixing your home loan rate. The benefit of a fixed rate is the certainty it provides. A fixed rate means your home loan interest rate won’t change for a predetermined period of time.
The benefit of this, of course, is that you’ll be insulated from any rate rises. The drawback is that you won’t benefit from any rate decreases during the fixed period, and you’ll be locked into your home loan for the duration of the fixed period and could be charged substantial break fees if you choose to exit it. Another drawback is that fixed-rate products often don’t offer the same features as variable-rate home loans.
However, if you can find a fixed rate that’s lower than your current rate, it could make sense to lock in your rate. A fixed rate allows you to budget with certainty, knowing what your repayments will be each month. If you’re comfortably making your repayments at the moment, refinancing to a lower fixed rate means you can be certain you’ll have no problem meeting your repayments for the duration of the fixed rate.
5. Don’t fall prey to inertia
It’s easy to stay in your current home loan rather than put in the work to refinance to a better deal. But putting in a bit of work could save you tens or even hundreds of thousands of dollars over the life of your loan. With this in mind, it’s important to remain vigilant and regularly check to make sure you’re getting the best deal you can.
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