The 6 questions you should consider before refinancing your home loan in 2023
Refinancing can be an effective way to save cash on your home loan – but there are a range of different factors to weigh up before you proceed.
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Given the rise in interest rates, there are plenty of Australians currently considering whether they should refinance their home loan.
Although refinancing can be highly beneficial, there are also longer-term considerations.
So today, we take a look at some of the important questions to ask yourself before you get started.
1. What sort of equity do you have?
Before you refinance, it's important to take stock of the equity you currently have in your home.
As a general rule, most borrowers are better off refinancing once they've got 20% equity.
If you have less than 20% equity, you may be required to pay lenders' mortgage insurance (LMI) again as part of the refinancing process.
Having to pay LMI twice when refinancing with less than 20% equity isn't usually optimum from a borrower perspective.
However, if you're close to 20% and you really need a better loan it may still work out better overall.
It doesn't necessarily have to affect your choice of lender for refinancing, either. QBE provides LMI for a wide variety of lenders.
However, it's important to factor in the extra costs that may occur before you proceed with refinancing. Our LMI calculator can help provide you with an estimation.
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2. Do you have future borrowing goals?
Refinancing can be a highly effective way to consolidate debt, reduce your expenses and get yourself a better loan.
However, it can have an effect on your credit score for some time afterwards and may affect your ability to access high-quality loans.
So if you have borrowing plans scheduled for the near future – for example, a car loan or personal loan – you may want to postpone refinancing for the time being.
3. What sort of interest rate will you get?
Getting a lower interest rate is arguably the main (though not only) reason for refinancing. After all, your interest rate directly affects the repayments you'll need to make.
Accordingly, you want to make sure that you're being offered a better interest rate than you currently have.
You'll also need to consider whether a fixed or variable interest rate is more suitable for your situation.
Fixed rates may offer certainty, as you're locking in a rate for a pre-determined period of time – generally 1 to 5 years.
Variable rates fluctuate over time in line with the cash rate. Accordingly, they can end up being cheaper or more expensive than fixed rates, in line with the wider economy.
4. Will you get better loan features?
Beyond the interest rate, one of the big drawcards for refinancing is gaining access to better loan features.
Offset accounts can help you make significant savings on your loan. The funds stored in it help "offset" the interest incurred over that period.
Our offset calculator can give you an idea of the savings you're able to make with an offset account.
Some people also opt to refinance to gain access to extra repayments, too. This can allow for the loan to be paid off much more rapidly.
Additionally, having access to cash redraw facilities can also be a useful way to access funds in case of an emergency, without having to apply for additional finance.
5. What extra charges are involved?
We touched on LMI previously, but that isn't the only cost that may be involved.
Your new (and current) lender may charge a few fees. Some of the most common include an application fee, valuation fee, settlement fee and discharge fee.
Additionally, some home loans also require ongoing annual fees to service the loan throughout its lifespan.
Individually, they may not be particularly expensive. But when they're all added together, it can be a significant chunk of cash – potentially offsetting the savings you'd make by refinancing in the first place.
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6. Will you save money overall?
This is arguably the most important consideration when you're looking at refinancing.
It's not the only consideration, of course. After all, loan features like offset accounts can effectively "pay" for themselves over the lifespan of a loan.
However, it is important to look at the dollar value you'll be saving month to month.
After all, refinancing should leave you in a better position to pay back your loan.
Visit the QBE LMI hub to learn more about LMI today.
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