If you are thinking about refinancing, it is best to consider all the reasons as well as options and if it is the right decision for you.
Unhappy with your current home loan or feel it no longer meets all your lending needs? Maybe it's time to look at refinancing. In fact according to the Australian Financial Group (AFG) Mortgage Index from June 2015 38.6% of mortgages written by their brokers was for refinancing, up 2.5% from June 2014.
What does refinancing mean?
Refinancing is when you switch your home loan, either to a new lender or with your existing lender. It's often done to get a home loan with lower interest rates or fees, or when circumstances change, for example when renovating a home.
Below is a home loan comparison table which you can use to get an idea of what's available in the market. You can also use our calculator below to see if refinancing makes financial sense for your situation.
To find out more about a loan from a particular lender click on the 'go to site' button and you can lodge an enquiry or begin an application.
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Refinancing isn't simply finding a better interest rate. It comes down to the costs, so you should work out if these are outweighed by the potential benefits.
There are many reasons why you should and shouldn't refinance, so read on to find out if it'll be worth it for you.
See how much it may cost you to refinance with our switching costs calculator.
It's no surprise that this is one of the most common reasons why Australians refinance their mortgages, but it's not always the best. Before you leave your home loan in search of a lower rate, make sure you calculate all of the fees and charges which will be associated with your new loan, as well as comparing the interest rates.
Will you save on costs?
Will you keep the same features?
Will the savings you make pay your refinancing costs off within 2 years?
Refinancing to renovate is another popular reason why borrowers leave their current lenders for greener pastures. There are a number of loans available for those refinancing for renovations: construction home loans and line of credit home loans. A construction loan is more appropriate for structural renovations where serious work is carried out to the home including new piping, wiring, walls or adding a floor to the home.
Where smaller, cosmetic renovations are carried out such as the installation of a new bathroom or kitchen, products such as a line of credit loans or even personal loans can be used.
Below are some of the reasons why refinancing can be a good idea for renovating:
- To access the equity in your property to fund the renovations. If your home is valued at more than the amount you owe on your loan you can refinance your loan to access that equity and then draw down on that amount to pay for your renovations.
- To increase cash flow during the renovation process. When you are renovating your home you are channelling a lot of your extra money into contractors, fixtures and fittings and this can be a good time to refinance to an interest-only loan to reduce the amount you need to pay towards your loan each month.
- Your existing home loan might not offer construction options. If you're going to be making extensive renovations to your home, and require or desire a draw down facility to minimise costs when building, a construction loan can be an alternative. Many home loans today offer construction loan options, but many don't, so you might need to refinance to one which does.
Another popular reason to refinance is to consolidate debts. This may involve adding a car loan, credit card loan or personal loan into your mortgage to take advantage of the lower rate typical of a home loan.
While the benefit can mean being able to rapidly pay off your debt, this kind of refinance requires strict discipline. If you roll your credit card debt into your mortgage for example, but then make regular payments, the shorter term debts you consolidated will now be paid off with your mortgage, taking as long as 25 to 30 years.
However, if you keep making the same repayments you were previously making, or if extra repayments are made towards the loan then this will work to pay off the debt faster.
Matthew's Debt DoubtMatthew has a $300,000 loan remaining on his home. He also has a credit card debt which has gradually spiralled out of control and sits at $20,000. Matthew wants to refinance and consolidate his credit card debt into his home loan, increasing the balance to $320,000. While he may think this is the best option to get him out of strife, Matthew's overlooking how interest will impact his debts.
- $20,000 at 5% interest over 25 years = Interest of $15,075 (monthly repayments of $117)
- $20,000 at 18.5% interest over 5 years = Interest of $10,799 (monthly repayments of $513)
As can be seen, while the monthly repayments are much lower with a lower interest rate over 25 years, the interest Matthew will pay is much higher.
If he instead rolled the $20,000 debt into his home loan and made regular monthly repayments of $377, he could pay this debt off in 5 years and only would pay interest of only $2,645.
Refinancing your existing loan to a new one with a larger or smaller loan size might be required if you're looking to buy a new home, depending on how much it costs. You might also want to make use of new features when you buy your next home that you previously didn't need, like an offset account.
If you're building a home, you might want to refinance to a home loan with a construction option. This option lets you withdraw the funds you need to pay your builder at the different stages of construction. This means amounts you haven't withdrawn yet won't be charged interest, saving you money during the time taken to build your new dream home.
A basic home loan can suit you when you first have a mortgage because it allows you to concentrate on making repayments without being distracted or being charged additional fees other complex features. However, if you are ready to really take control of your mortgage, you may want more flexibility with a fully featured loan. This means you'll get all the features including an offset account, split facility, redraw facility and much more to help you pay off your loan faster.
Variable rate loans tend to offer the most flexibility, but increased competition in the market has meant that some lenders are offering more features on fixed rate loans. The downfall with variable rate loans is that if the official cash rate goes up, your interest rate will most likely go up with it.
If you can't comfortably meet your mortgage repayments anymore you might be able to refinance your loan to extend the term and reduce repayments, or switch to a more basic loan with a lower interest rate.
If you're refinancing to a longer term to lower your repayments, know that you might end up paying more interest than what you normally would've. Also, rather than refinancing, it might be worthwhile speaking to your lender and explaining to them that you need some extra time to sort out your financial situation. If you can no longer afford repayments, write a budget and work out why this might be happening. Are you spending too much on holidays? Is your credit card or personal loan debt getting out of control? Is it perhaps time to start a side business?
If you're looking to refinance to a home loan with a lower rate, be aware that exit fees and upfront costs might reduce some of the savings, so ensure you can cover these costs. Make sure you look at our cashback page from time to time, as lenders have been known to give $1,000+ to those refinancing to them as an incentive.
Lenders have hardship teams devoted to helping you if you're experiencing a difficult period, so be sure to speak to these professionals before refinancing.
If you have bad credit you can still refinance your home loan, although you may need a specialist lender to approve your mortgage depending on how severe the negative listings on your credit file are. Bad credit home loans can have higher interest rates than regular home loans, so if you've been diligently paying off a bad credit home loan and feel it's time you refinanced to a regular home loan with a regular interest rate, you might want to first contact a mortgage broker or speak to your existing lender.
They'll be able to advise you about whether or not it will be possible to switch to a regular home loan or not and save you the hassle of applying for a home loan if you have a slim chance of being approved.
You can refinance your mortgage as much as you'd like, but there is a point where it doesn't become economical and will end up costing your money, rather than saving you money.
Data from mortgage broking company AFG suggest that refinancing activity is a lot higher when interest rates are going down, so the average number of times a borrower refinances in their lifetime for their main residence varies according to the economic cycle.
These life stages suggest that a typical borrower could refinance up to five times to a loan that suits their situation.
- First home buyers - usually a low and fixed rate with no features so they can focus on paying back the loan
- Young professional or family - a variable interest rate with a range of features to pay off their loan sooner.
- Middle aged professional - a variable rate or line of credit with a range of features to tap into their equity for more investments.
- Preparing for retirement - a line of credit loan to tap into equity to make larger investments than the previous life stage.
- 55+ or retired - line of credit or reverse mortgage.
Experts suggest that you perform a health check once a year to evaluate if your current mortgage is meeting your personal and financial needs. If you're happy with loan, then there is no need to refinance. However, if you've reached the conclusion that your loan is not meeting your needs one way or another, then it might be time to start assessing whether refinancing makes financial sense for your situation.
This process involves assessing your personal and financial situation, as well as comparing other loans in the market to see if you're truly getting the best deal.Back to top
Estimates about the cost of refinancing vary between $500 to over $3,000, so you should ask your current lender, as well as your potential lender what costs you'll be up for before considering refinancing. Note that the costs below are indications only and do not take into account your personal situation.
Fees charged by your current lender
- Discharge fees up to $400.
- Exit fees (these now only apply to fixed rates and loans entered into before July 2011).
- Registration fees.
Fees charged by your new lender
- Application fees up to $600.
- Valuation fees up to $300.
- Settlement fees up to $300.
- Legal fees up to $150.
- Lender's Mortgage Insurance, even if you've paid it for your current lender.
- For those living in VIC, NSW, TAS, WA or SA, in some cases stamp duty will need to be paid on the new mortgage.
In some cases, you may be able to switch from one home loan your lender offers to another one which has the features you're looking for. There can be switching costs involved depending on the lender, so be sure to discuss this first before carrying out the switch.
Not every borrower will receive savings by refinancing. In many cases it might be worth asking your current lender for a discount on your interest rate if you just want a cheap rate.
Lenders usually have a department dedicated to retaining customers. These service representatives have been known to lower interest rates or waive different fees if you tell them you're considering refinancing. In some cases these savings can outweigh what you would have received by switching loans, especially given that you won't have to pay any exit fees or upfront fees for leaving your home loan to get another.
The steps to refinancing your mortgage
1. Research the costs that will be involved.
2. Decide why you want to refinance.
3. Compare current home loans on the market or enlist the help of a mortgage broker.
4. Speak to your current lender, they may offer a better deal.
Read more on the steps involved with refinancing with our step-by-step guide.
Before deciding to refinance there are some considerations that you should take into account. One of these is that a lower interest rate alone does not necessarily mean that the mortgage will be cheaper than the loan you already have. Some loans are promoted on the basis of a lower interest rate but when you look closely at the fine print you may find that the fees and charges will more than make up for the lower interest rate. Make sure you check the comparison rate, which takes into account more of the fees.
The lower interest rate may also mean a loss of flexibility in your home loan. You may lose the ability to make additional payments when you have spare money to invest such as any bonus in wages or tax returns, or lose valuable features such as offset accounts. This means you must be careful in what you are doing and know exactly what the result will be if you decide to go ahead.
A further consideration will be the cost of any exit fees that are charged before you can be released from your old home loan obligations. In the case of new loans entered into after 1 July 2011, these exit fees only apply to fixed rate loans. Sometimes these fees can be quite substantial, especially in the early years of your existing mortgage. On the other hand some lenders discontinue the exit fee after you have been repaying the loan for five years or more.