Refinancing after retirement
Refinancing your home loan after you retire could save you money, but there are risks you should be aware of before you start shopping around.
With property prices at an all-time high in many locations around Australia, retiring with your mortgage fully paid off is becoming a thing of the past. Instead, an increasing number of Australians must continue paying off their home loans well into retirement.
No matter what stage of life you’re in, it pays to regularly review your home loan and consider whether it still meets your needs and whether or not you may be able to refinance and find a better deal. This is especially true in retirement, when it’s crucial that you can look after yourself financially.
However, before you refinance, you should consider the pros and cons of this approach and whether it’s right for you.
What you need to consider
- Lower rate. Locking in a mortgage with a lower interest rate can save you a substantial amount of money over the life of your loan, which is ideal for your retirement years.
- Finance options. While some retirees could benefit from a loan with a reduced interest rate and lower fees, other borrowers might want to switch to a loan that allows you to access equity. A line of credit or equity home loan can help free up some cash for use in your retirement, while some retirees may prefer the security of a fixed rate loan and its consistent repayments.
- Managing your repayments. You need to be certain that you will be able to comfortably make repayments on time during your retirement. Consider your current financial capability and your ability to make repayments for several years without a stable income.
- Lower bargaining power. Convincing a lender to refinance your loan once you’ve retired can be a difficult prospect. Without a steady income stream to rely on, you’ll be viewed as a higher-risk borrowing prospect than you would have been when you were in full-time employment.
- Costs vs savings. Although the potential benefits of refinancing might sound attractive, remember that banks and other lenders don’t let you refinance for free. Refinancing typically comes with a number of fees attached, so you’ll need to work out whether the penalties you will have to pay will outweigh the savings you’ll enjoy after refinancing.
- Plan ahead. Continuing to pay off a mortgage well into retirement is far from an ideal situation. With this in mind, planning ahead and assessing your home loan options in the lead-up to your retirement (5, 10 or even more years in advance) is the best way to set yourself up for a financially secure retirement.
How retirees can go about refinancing
- Consider your needs. The first question you need to ask yourself is whether or not your current home loan meets your needs. Can you comfortably afford to service the loan? Are you getting the best deal available? Could you benefit by switching from a variable to a fixed interest rate to enjoy fixed repayment amounts? It’s also essential that you consider your plans for retirement, such as if you would like to travel the world, downsize to a smaller home or something else.
- Identify risk. Refinancing during your retirement years is not always advisable due to the risk involved. If the cost of refinancing outweighs the benefits, you will be worse off financially. This is particularly risky considering you no longer have a reliable income source. You also need to consider the interest rate and market risk involved when opting for a new loan. Will you refinance to a fixed rate or split loan to minimise the risk of rising interest rates? Do you have enough savings to service the mortgage repayments?
- Sort out your finances. Speak to a financial planner about how you can effectively manage your finances for your retirement. A financial planner will be able to help you determine whether refinancing could be an effective and affordable strategy for you. A financial planner can also help you make the most of your super balance, develop a reliable tax strategy during your retirement and ensure that money never becomes a worry during your golden years.
- Get in touch with your lender. If you decide that refinancing your home loan could be a viable option, the next step is to contact your current lender and discuss your options. Borrowers of all ages have the freedom to negotiate the interest rate on their current loan — all you have to do to start the process is phone your bank. The home loan market in Australia is very competitive, so you might be surprised to find out how many lenders are willing to compromise a little. Of course, if you want to refinance so you can take out a different type of loan or access different borrowing features, you may need to look at the prospect of switching to another lender.
- Calculate costs. Exiting your current mortgage doesn’t always come cheap, so you’ll need to weigh up the benefits of refinancing against the extra expense you will incur. There are government charges for exiting your current mortgage, while many lenders also impose a discharge fee of somewhere between $150 and $350. Refinancing from a fixed rate loan will usually lead to a break fee. The next thing you need to consider is the cost of taking out a new loan, including application and establishment fees, legal costs and more. Our switching cost calculator is a useful tool when calculating the cost of refinancing, but make sure to seek advice from your accountant or financial planner so you can make an informed decision.
- Compare home loans. You can start comparing a wide range of home loans below, allowing you to narrow the lenders and loan features suited to your requirements. Once you understand your refinancing needs, you can speak with a mortgage broker to receive expert advice tailored to your situation. For example, maybe you want a no-frills loan that offers the cheapest possible repayments, or perhaps you want a line of equity loan that can help fund a trip around Australia. A broker can examine your financial situation and present you with a choice of suitable loans from a panel of lenders.
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Refinance or downsize?
For many people, refinancing after retirement isn’t always a viable financial option. While a four-bedroom, two-bathroom family home might have been essential when you had three kids living with you, servicing a loan on a big house – not to mention looking after the maintenance on the property – is often no longer practical when you reach retirement age.
Consider the potential financial benefits of refinancing relative to the advantages of downsizing. If you were to sell your current home and move into a smaller residence, would you be better placed financially than if you refinanced your current loan on your current home?
There are several expenses to consider when refinancing a loan, including discharge fees on your current loan and application and legal fees for the new loan. Make sure you’re aware of all the potential expenses you could incur before you commit to this course of action.
If downsizing sounds like the best option for you, you’ll need to calculate all the costs involved in selling your home and purchasing another one. Selling costs include any repair or maintenance work that needs to be completed before selling, advertising costs, real estate agent commissions and discharge fees on your current home loan. There’s also the expense of moving into your new place, so use our property selling calculator to start doing the sums.
Before you commit to selling your home, it’s a good idea to wrap your head around the current performance of the local real estate market. A good real estate agent can explain how much similar properties in the area are worth and how much you could realistically expect to receive for your home, while you may also be able to increase the sale price by undertaking a few minor renovation projects.
Finally, consider whether or not now is a good time to list your property on the market. Selling your property can take a substantial amount of time and money, while buying a new property can also add costs such as stamp duty, conveyancing fees and lenders mortgage insurance. The sheer number of issues to consider can be a little daunting, so don’t hesitate to seek expert advice.
Whether you decide to refinance, downsize or simply stick with the status quo, make sure to compare all your options before deciding on the best course of action for your situation.
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