How often should you refinance your home loan?

There is no hard and fast rule as to how often you should refinance your home loan, though many Australian borrowers switch loans after five or six years. There are also certain events that could trigger a desire to shop around for a better mortgage deal.

A 2022 report from PEXA found that Australian homeowners refinanced their home loan on average an estimated 5.6 years after purchasing their property. These refinances may have been due to external factors like changing interest rates, or due to changing personal financial circumstances for the borrowers.

The Reserve Bank of Australia announces on the first Tuesday of every month whether the cash rate will be increased, decreased or left on hold.

The cash rate is the guiding figure by which lenders determine their own variable interest rates although there is no rule that expressly links the two. This means that even though the RBA may announce a cut to the cash rate, your lender can decide not to pass this cut on to customers.

By keeping track of the cash rate, and how your lender responds to cash rate changes, you can determine if it may be a good time to refinance your loan. This may mean refinancing to a lender who reliably cuts rates when the cash rate drops, or one that holds back on passing on rate increases.

While refinancing every month based on cash rate movements may not be practical, it may still be worth following how the cash rate is tracking, and how your lender is responding, to help you work out a good time to refinance.

Although not so much a concern for fixed rate borrowers, variable rate home loans can be subject to out-of-cycle rate increases at your lender’s discretion. These are rate increases that are not directly related to the cash rate set by the RBA. These rate hikes may not be publicised by your lender, so you may only notice if you remember to read communications from your bank and closely check your statements each month. 

If you monitor your rate and notice it is creeping higher and higher, it may be time to consider refinancing to another lender. For example, if there’s a difference of more than 1% between your current interest rate and the market average, you may see a significant difference in your interest charges when you run the numbers through a mortgage calculator, which could indicate that a refinance is due.

Where possible, it can be useful to negotiate with your lender first to see if they will offer you a discount on the rate you are being charged. If they can’t or won’t, it could be time to consider refinancing with another lender.

If you signed up for a home loan that includes many different features, chances are that you are paying for the privilege, with either an above average interest rate or in fees. This is not necessarily an issue if you regularly use the features and derive some benefit from having them attached to your loan.

If, however, you find that you aren’t making use of a vast majority of features, it may be worth refinancing to a more basic loan, offering low rates and fees.

If you signed up for a basic loan that offers very little in the way of extras, you may later find that you want to access a certain feature.

For example, maybe you have had a significant pay increase and now you wish to be able to make unlimited extra repayments to your loan. Or perhaps you are planning on taking some time off work to raise a child and you would benefit from taking a repayment holiday.

Whatever the case, as you come to learn more about home loans and the features they offer, you may find you are keen to refinance to gain access to a certain perk.

For many borrowers, deciding when to refinance can be as simple as coming to the end of their fixed rate period. It is generally not advisable to switch home loans during a fixed rate period, as you will incur a break charge from your current lender, but when the fixed period is up, it could be time to shop around.

After a fixed period, your loan will generally revert to the variable rate offered by your lender. There is no guarantee that this rate will be the most competitive, as rates could have substantially risen in the meantime, so you may want to take this opportunity to see what else is on the market. It is also a great opportunity to consider what other features, if any, you would like in a home loan and to find a loan that offers the extras you need.

You might also choose to refinance to roll your other debts, like personal loans and credit cards, into your mortgage. A consolidated debt can be easier to manage, and you could be facing lower fees.

However, even if you refinance your debts to a lower interest rate, you may still end up paying more in total interest charges by rolling your short-term debts into a longer-term loan. It’s important to do your calculations to ensure you select the best option for you. 

Even if it looks like the time is ripe to consider refinancing, you may find that you aren’t yet ready to switch home loans just yet.

Equity is the proportion of your property that you own yourself, and doesn’t have a mortgage owing on it. Your equity is the difference between your property’s current value and the amount you still owe on your mortgage principal.

If you don’t have at least 20% equity in your home, it might not be the best time to refinance yet. This is because you’re likely to be hit with Lenders Mortgage Insurance (LMI), just like when first buying a property with a low deposit, as you are essentially taking out a new loan.

If you don’t have 20% equity, you may still be able to switch lenders if you are prepared to pay LMI, which costs thousands of dollars. If you already have LMI with your existing lender, you won’t be able to bring it over to your new lender when refinancing.

You may be able to add the LMI charges to your loan amount to be repaid over the long term, however you’ll have to pay interest on it as well as your principal loan amount, which may increase your repayments.

When you apply to refinance, lenders will also consider your credit record. If your credit history isn’t looking the best, such as if you’ve had late payments or defaults on your mortgage in the past, it may not be easy to successfully refinance

Keep in mind that every application you make for a loan is included in your credit report, so it’s often best not to make multiple refinance applications with different lenders in a short period.

Before you refinance, you may want to consider the potential positives and negatives for you and your finances:

Pros

• Potential savings if you switch to a lower rate
• Access to features you may not currently have that can help reduce interest costs

Cons

• Potential exit and break fees, especially for fixed loans
• New loan may charge establishment fees and other set up costs

Refinancing home loans can offer you savings if you take the time to do some planning and your homework. It may be an idea to give your mortgage a health check every 12 months or so by seeing what else is on the market and see how your home loan compares.

Remember to work out if you will be better off switching and if you will save more by doing so by not only considering the interest rate but all the fees associated with switching.

If you think that you could benefit by refinancing your home loan, shop around and compare home loans online to see what deals are currently available and see how much you can save. To work out what your new repayments could look like, you can use the RateCity home loan repayment calculator.