Should you refinance your home loan?

There are many different reasons why people choose to refinance their home loans, with each person’s decision being based on their own unique circumstances. Here are a few popular reasons why some people choose to refinance, to help you work out if one or more may apply to you at this time:

• Your loan has changed
• You want to consolidate other debts
• You just want a better rate and/or to pay less
• You want to be treated better
• You want to use your equity
• Your lifestyle has changed
• You want to pay your loan off faster
• You want a home loan with more (or fewer) useful features and benefits
• You want to remove a guarantor from your home loan
• You’re in financial stress

Were you on a home loan with a fixed interest rate? Did you get a discount on your variable rate as an introductory bonus offer? Once these offers come to an end and you switch to your loan’s revert rate, you may find that your repayments are nowhere near as affordable as they used to be.

This may be especially true if you are one of the many Australians who fixed their loan when the cash rate was at a record low during the pandemic. Many of these record-low rates are set to expire in 2023, leading to the risk of the nation falling off a fixed-rate cliff. 

Refinancing to a mortgage with a lower rate could help to keep your repayments more manageable, limiting the impact on your household budget.

Do you have outstanding debts owing on credit cards or personal loans? Are the interest charges on these debts eating up a significant chunk of your budget each month?

Refinancing may let you borrow a bit more money to pay off these outstanding debts in one fell swoop, effectively consolidating your credit card or personal loan debts into your home loan. Because home loan interest rates are generally lower than those on credit cards and personal loans, you’ll likely pay less in interest each month, easing some pressure on your budget.

However, because home loans are paid off over much longer terms than most personal loans and credit cards (decades, compared to months), you’ll risk paying much more in total interest on your smaller debts by following this strategy. You may be able to lower this risk by taking steps to make extra repayments and clear the extra money quickly.

Even if you got the lowest home loan rate available when you first applied for your home loan, it’s unlikely that you’ll still have the lowest rate on the market after a few years have passed. Lenders adjust their home loan interest rates regularly, and often offer their best discounts and special deals to new customers.

If you still want to keep your home loan’s repayments competitive, every few years you may want to compare the home loan market and see if you can get a better rate.

You could try contacting your home loan provider and see if you can negotiate a discount. Depending on how you go, the next step could be to contact a competing mortgage provider and look at their refinancing options.

Unfortunately, not every customer receives the level of service they expect from their bank or mortgage lender. If you’re not a fan of the time you spend on hold when you call your bank, or if their online banking systems are driving you up the wall, you may consider refinancing so you can switch to a lender that treats you better.

Similarly, if another bank has branches, ATMs and other more accessible services in your area, this could be another reason to consider jumping ship.

Once you’ve been paying your home loan for a few years, you’ll likely have built up some equity in your property. This can be especially true if property prices have risen in your area, and your home’s value has increased.

This equity can be used as security when you refinance, and may help you get a lower interest rate. Depending on your circumstances, you could also use your equity to secure a line of credit (a kind of personal loan that works similarly to a credit card with a limit based on your equity), which you could use to pay for renovations, or buy a car at a lower rate than many car loans.

It may also be possible to use your equity in one property to help you secure a loan on another investment property, though there may be risks involved with this sort of strategy. 

Ever since you first got your home loan, more than a few things may have changed in your life. You may have started a family. You may have started or ended a relationship. You may have lost your job, or gotten a better-paying one.

If the home loan you originally applied for no longer suits your current situation, you may want to think about refinancing to a mortgage that more closely matches your finances and lifestyle.

The sooner you can get out of debt, the less money you’ll need to pay in interest charges. Refinancing to a home loan with a shorter loan term will mean more expensive monthly repayments, but you’ll pay less in total interest on your mortgage.

You could also refinance to a home loan that offers the option of making extra home loan repayments. These can help reduce the principal amount owing on your home loan, which can shrink your interest charges and bring you closer to exiting your loan early.

When you applied for your first home loan, you may have been limited in what mortgage features and benefits you could access. But by refinancing, you could switch to a lender that offers:

• Extra repayments
• Redraw facility
• Offset account
• Loan portability
• Repayment holidays

Refinancing to a home loan with features and benefits that match your personal financial situation could make a big difference to the level of value you enjoy.

On the other hand, the more features and benefits a home loan offers, the more it’s likely to cost in fees and interest charges. If your current home loan includes features and benefits that you aren’t really using, you may enjoy more value by switching to a more basic “no-frills” home loan.

Australians who struggle to save up a home loan deposit may still be able to apply for a mortgage if a parent guarantees the loan with the value of their own property. This can help a borrower become a homeowner without spending a long time saving, or shelling out for expensive Lenders Mortgage Insurance (LMI).

However, being a guarantor can put pressure on your parent’s credit score and personal finances. And if you’re unable to pay your mortgage, they will become responsible for your debt.

After some time has passed, if you’ve built up some equity in your own property, you may be able to refinance your loan without support from your guarantor. This can free up their own finances, allowing them to use their equity for other purposes, such as taking out a reverse mortgage in retirement.

If you’re struggling to pay your home loan at present, switching to a cheaper loan could be one way to ease some of the pressure. However, because refinancing effectively means getting a whole new loan, this could make it more difficult to get a mortgage approved with a new lender, depending on your exact circumstances.

Consider contacting a mortgage broker or a financial counsellor before choosing to refinance your mortgage, to make sure the decision will be right for your needs. Also, remember that refinancing may involve paying a range of fees and charges – make sure the benefits will be worth the costs.