Ten tips to know before refinancing your home loan

It’s relatively rare to stick with the same home loan for the entire loan term in Australia. Considering that refinancing is such an essential part of the mortgage process, it’s important to be aware of some of the common issues that could arise, as well as ways to help the process proceed more smoothly.

According to a 2022 PEXA survey, Australians refinance their home loans an average of 5.6 years into the term. With many Australians teetering atop a fixed rate cliff, and record-low rates set to expire through 2023, refinancing activity is likely to intensify.

Here are ten tips to help you with your next refinance:

1. Pay attention to the comparison rate and loan type

Whether interest rates are in a rising or falling cycle, mortgage lenders will always compete. But the best deals aren’t always the home loans with the lowest interest rates. Some low-rate home loans also have high fees and charges, or don’t offer value-adding features and benefits.

You can get a better idea of a loan’s true cost by checking the comparison rate, which combines interest and standard fees and charges into a single percentage.

It’s just as important to understand whether a fixed rate or variable rate is right for you. Fixing your interest rate can help keep your budget stable for a limited time, but you may not enjoy as much flexibility as you might with a variable rate home loan.

2. Watch out for honeymoon rates

Mortgage lenders often offer discounted rates and cashback deals to attract the business of refinancers. While these offers can be appealing, it’s important to step back and take an objective look at the value of these offers.

For example, “honeymoon rates” are discounted interest rates that only last for a limited introductory period. While they offer the opportunity to save money and/or make extra repayments early on, they typically revert to a higher rate further down the line, which may cost you more money.

Similarly, fixing a low interest rate will only lock that rate in for a limited time, and when it comes time to revert to the lender’s variable rate, it may have risen substantially in the meantime.

Cashback deals can also be helpful for relieving some of the budget pressure of refinancing, such as by offsetting some of the switching costs. But their value may be limited if the loan itself isn’t also worth switching to.

3. Choose loan features that match your refinance goal

Before refinancing, it’s important to ask yourself what you want from your home loan, whether that’s:

• To save money;
• To pay your loan off sooner; or
• To use any savings you might have to offset your home loan balance. 

From here, you can then work out which features are the most important to you, such as:

• Low interest rate
• Low fees
• Ability to pay it off sooner
• Ability to offset your interest with your savings
• Package (with a credit card, line of credit, home insurance etc)

You may not need a home loan with all these features, which may affect your choice of mortgage. For instance, it might not be worth stumping up extra for a home loan with an offset account if you aren’t going to use it.

4. Consider keeping your current loan term

A common trap for refinancers is extending their loan term without even realising. This is even more important to consider if your top priority in a home loan is to pay it off sooner.

For example, if you’re 10 years into a 30-year loan, and you refinance to another 30-year mortgage, you may end up paying more money over the life of your loan, rather than saving money, even if a lower rate means your monthly repayments are lower. This is because you’ll be paying interest for the extra years you’ve signed on for, costing you more in total.

5. Check what fees and charges apply

If you decide to refinance, it may pay to check the fees and charges that could apply, such as discharge fees from your old lender, and upfront charges from your new lender. Remember to budget for these fees and charges when organising your refinance.

In some cases, you may be able to negotiate with your lender to waive some or all of the upfront fees and charges when you refinance. Some lenders may be happy to give up these fees if it means getting a new customer on board.

6. Calculate your interest savings to find the break-even point

Using a mortgage calculator, you can work out the cost of repayments on a new home loan and compare these costs to your current loan. This can give you your potential interest savings from refinancing.

From here, you can also estimate how long it will take to reach your ‘break-even’ point, where your interest savings from refinancing make up for the fees and charges you pay to switch. This can help to put the cost of refinancing into perspective, and show you the potential value of your new home loan.

7. Beware of the bank’s valuation

Lenders will need to revalue your property if you are refinancing your home loan. If your property’s value is lower than expected, such as if property values in your area have gone down, your loan-to-value ratio (LVR) could go up. This might affect the interest rate a lender is willing to offer you. 

For example, let’s say you’ve owned your property for five years, and thought the LVR of your mortgage was 80 per cent or more by now. You decide to refinance, and the new lender sends a valuer to your property, who values it at less than the price you bought it for five years ago. This means the equity you hold will be less than 20 per cent, meaning the lender may charge you lenders mortgage insurance (LMI). There’s also a chance the lender may decline your refinancing application if your LVR is too high.

If your valuation comes back lower than expected, it could be worth speaking to your mortgage broker or lender, as well as attempting to get a second valuation.

8. Assess your financial position

It’s important to ask yourself whether your financial position has changed significantly since you first purchased your property. This could include:

• New job: This may affect your borrowing power
• New debts or loans: Extra financial commitments may affect your ability to service repayments
• Having a child: This could seriously change your lifestyle and add to your everyday expenses

All these factors and more could affect your chance of approval when you apply to refinance your home loan, as well as your potential borrowing power.

9. Should you borrow extra or consolidate debts?

If you have enough equity available, you may have the option to borrow more money when you refinance your mortgage. You could use this money to renovate your property (potentially raising its value further) or to pay off other outstanding debts (such as car loans and credit cards), effectively consolidating them into your home loan.

While these options can be useful to the right borrower, it’s important to remember that increasing the size of your loan like this could keep you in debt for longer, costing you more in interest charges over time. Be sure to compare the costs to the potential value before deciding.

10. Get help from a broker if you need it

Mortgage brokers aren’t just for first home buyers. A skilled broker can also help a current borrower find a better deal and assist them with the refinancing process.

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