Should you refinance your home loan now?
When you're looking to refinance, the timing is crucial. And right now, there's a lot to consider before making the switch.
For many Australians with mortgages, refinancing might seem appealing right now. Interest rates are at record-lows, and borrowers who haven't checked their home loan interest rate in a while might be surprised to see how it compares to some of the lowest rates on the market.
If this is you, it's a good idea to speak to your bank about your current rate and what options might be available to you. But if better deals are available elsewhere then you could also consider switching to a new lender.
With home loan refinancing, getting the timing right is crucial. For some borrowers, refinancing sooner means bigger savings. But borrowers who aren't in a strong financial position might be better off waiting.
Here's what you need to consider.
Take a close look at your home loan
Interest rates are very low right now. So if you're looking to refinance your home loan in the next few months, you might have a good chance of finding a better deal.
Look at your current interest rate and see if it's competitive compared to the lowest rates on the market. If your rate is higher, switching soon could lower your repayments which means you can start saving sooner.
Use an online refinancing calculator to toggle and play around with some scenarios to see how much you could potentially save by switching to a lower rate. You can even see how much faster you could pay off the loan if you upheld your current repayment amount.
Work out your switching costs
You also need to check your home loan rate type. Borrowers with a variable rate home loan will have an easier time switching, though you might have to pay a discharge fee.
Borrowers on a fixed rate home loan may have to pay more for breaking their loan during the fixed period. This is called a fixed loan break cost. If you have some time left before your fixed period ends, you might be better off waiting for now to avoid these costs.
If you have a fixed rate home loan, the timing here is crucial. If you have a number of years left on your fixed rate, the costs will generally be higher. If there are only a few months left on your fixed period, the break costs will generally be lower. Check with your lender to see how much it will cost to break your fixed rate home loan. The savings that could come from switching to a lower rate and reduced repayments soon may outweigh the break costs if you are in it for the long term. It's worth doing the maths.
Re-examine your financial position
Your current financial position is one of the key factors in determining whether refinancing is worth it.
When you refinance with a new lender, you need to submit a new application. The lender will assess your income, expenses, debts and spending to determine how much they can lend to you.
If your salary has increased since you got your current home loan, this is one factor that demonstrates how you're in a better position overall. But a lender will still examine your recent spending habits and credit score, to ensure you're in a position to repay the loan over the long term.
And if you've lost your job or seen your income drop significantly, then you might want to speak to your financial provider to discuss your options. Record low interest rates are great, but you still need to be in a strong financial position in order to refinance and get your application approved.
Re-examine your property and your equity
While home loan rates are competitive right now, the value of your property and your equity position will play a key role when applying to refinance with another lender.
You generally want to own at least 20% of your property when refinancing. Otherwise, your new lender may require you to pay lenders mortgage insurance (even if you already paid it on your current loan). This could add thousands of dollars to your switching costs.
A quick refresher on home equity: This is the current market value of your property, minus your remaining home loan debt.
If you've had your home loan for a while and you've been making regular principal and interest repayments, then your equity may have increased as your debt has shrunk. If your property has risen in value over time, this may also boost your equity position even further.
But some borrowers may find that they have less equity than they expected, or even negative equity. There are several reasons for this. One could be only making interest only repayments on your loan. If you haven't paid off any of the principal loan, then you won't have built up equity through repayments.
Another possibility is that the value of your property has decreased. While prices tend to rise over time, this is never guaranteed. And prices in some areas may have fallen slightly since you bought the property.
Before refinancing, it's worth checking recent sales prices on similar properties in your neighbourhood. You may even want to get a valuation conducted for your home.
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Look out for cashback offers
Quite a few lenders now offer generous refinance cashbacks if you switch to one of their home loans. While a tempting cashback offer should not distract you from looking hard at the loan's interest rate and other features first, a cashback offer can score you a couple of thousand dollars on top of any potential savings you may get from refinancing.
If you're interested in getting a cashback when switching, checking the dates and eligibility details on these offers is very important. These cashback offers are usually limited-time offers that change after a few months.
For example, Westpac is currently offering a cashback up to $3,000 for eligible borrowers who refinance to their bank. But there are specific eligibility requirements, as with most cashbacks. It needs to be on your first application, you need to be refinancing at least $250,000, you need a loan-to-value ratio of 80% and you need to be switching to specific Westpac home loans. You can read the full terms and conditions here.
Once again, it's important to do the maths when it comes to cashback refinancing offers – a few thousand dollars up front may sound great, but you want to ensure you're getting a good deal over the long term when it comes to rates, fees and other charges.
Credit Criteria, fees and charges apply. Terms and conditions available on request. Based on Westpac's credit criteria, residential lending is not available for Non-Australian Resident borrowers.