Mortgage refinancing – when does it make sense for you?
8 December 2022
There's been an upsurge of Australian homeowners rushing to refinance their mortgages thanks to the rising interest rates. In September, home loans worth over $17 billion were refinanced with a new lender (2022), according to the Australian Bureau of Statistics.
With the current turn of events, you may be wondering if you should take the jump. In general, there are benefits of refinancing, including saving money and getting a lower interest rate for your loan. However, you still need to do your homework as there are several factors involved when it comes to mortgage refinancing.
What does refinancing your mortgage actually mean?
A mortgage refinance is the replacement of an existing mortgage with another under a new interest rate and term, often with a new lender. When completing a refinancing, the existing debt is paid out by the new lender, with a new loan being created against the security.
Given that you're shifting to a different loan, it's important to do adequate research to find one that meets your needs. Similar to your old home loan, you may expect to fill out some paperwork as well as go through a step-by-step refinancing process which includes:
Determining why you're refinancing. What are you looking for? Is it reduced monthly repayments, lower interest rates, or changing the loan term? Being clear on reasons for refinancing will help you identify the best loan product that suits your needs and outcomes.
Assessing your finances: Knowing your financial position will guide you on whether it's a good idea to take on this new loan or not. You need to take a look at your assets, liabilities, income, and expenses. This also includes the equity you have in your home. Equity is the difference between how much your home is worth and how much you owe on your mortgage. For example, if your home is valued at $500,000 and the mortgage owed is $350,000, then your equity is $150,000.
Figure out the cost of refinancing: With refinancing, you may be up for some extra money in your pockets. However, being aware of the associated costs will ensure you don't strain yourself and stay within budget. There is a range of fees such as loan application fees, discharge fees, valuation fees, land registration fees, ongoing fees, and break fees.
Looking around for lenders with the best rates: You can work with a lending and finance advisor to identify a range of options and a suitable new lender offering interest rates and terms in the market that matches your financial needs and current situation.
Preparing the necessary documentation: Prepare the documentation with the information needed to process the loan application once you settle on your preferred lender. The details needed for refinancing may include proof of income, personal details, expenses, assets, liabilities, and earnings including details of existing loans.
Going through loan approval and settlement: Beforehand, depending on the lender, your home may be appraised for value, which may take three to five days. After you've signed and submitted all the relevant paperwork to the lender, the approval process will start. Once approved, the new lender will notify the current lender you intend to discharge the existing loan. The current lender will communicate to you the final payout figure and settlement date. Then the new lender will pay out the old loan. This completes the refinancing process before you're provided with the new loan.
When would refinancing your mortgage be the right decision for you?
Australians, on average, refinance their mortgages every 4 to 5 years. On an individual level, your timeline may be different depending on your personal situation. You may be thinking it's time to switch to a new loan if it offers features that your existing loan lacks. Whatever your reasons, mortgage refinancing offers great benefits, making it the best option.
Refinancing may be the right decision for you:
If your current interest rate is higher than an alternative interest rate available with the same lender or another lender. According to the 2020 report by the Australian Competition and Consumer Commission (ACCC, 2020), refinancing a home loan of $250,000 could save the borrower up to $1,400 in interest in the first year and more than $17,000 over time. A lower interest rate means saving money and having lower monthly repayments, which allows you to settle the loan more quickly.
If you are coming to the end of a fixed rate term – generally a fixed rate loan will revert to a variable rate much higher than the average market rate. A fixed-rate loan is offered at a fixed interest rate, usually 1 to 5 years, so the borrower knows the exact amount of monthly repayments to make. As for a variable rate loan, the interest rate may be changed by the lender as per the lending market conditions. This means the borrower will pay varying monthly repayments. You may potentially save money with a variable-interest loan if interest rates go down with the market forces. However, it could end up risking your cash flow if the interest rates go up, which increases your repayments. Refinancing allows you to negotiate a new fixed rate with a lender, allowing you to budget accordingly for the specific monthly loan repayments without worrying about fluctuating interest rates.
If you'd like to access the equity in your property; this may be for a variety of reasons, such as:
Buying a car or asset
Paying for a holiday
Completing landscaping on your property
Keep in mind, refinancing at a lower rate enables you to build your home equity at a faster rate. The more your equity, the more you can tap into it to finance your major expenses. It's even possible to use the equity as a down payment for an investment property.
Finally, there are often 'cashback' offers for refinancing. For example, one current lender will pay you $4,000 upon settlement of your refinanced loan (with conditions). Currently, it may be a good time for those who want to consider changing to a new home loan as lenders and banks are proactively enticing borrowers with incentives such as cashback offers aside from competitive interest rates. Before deciding if a cashback deal is worth your time, it's vital to consider all associated costs and to be certain that a lender is right for you. This way, you don't choose a cashback deal that is attached to a loan that will cost you more in the long term.
Important considerations when refinancing your mortgage
When refinancing your mortgage, it is important to consider the short and long-term consequences. Remember, your personal and financial circumstances come first before considering the type of rates and features lenders are offering.
In the short term, there will generally be benefits: reduced repayments (by lowering the interest rate), cashback bonuses, clearing the mortgage debt in a shorter time, and cashing out your equity for other purposes which will likely have positive effects on cash flow. Refinancing also allows you access to certain features offered by a lender, such as being able to make extra repayments which shortens the loan period.
In the long term, however, refinancing (say when done for a full 30-year term) can result in more interest being paid over the life of the loan as you are extending the overall time to pay off the debt. It's therefore wise to first calculate the overall cost of the loan, since it's not enough to just choose a loan product due to lower interest rates and lower monthly payments. Or you could reduce your loan term with a refinancing which means your monthly payments could increase which will make better savings on interest and increase the rate of building your home equity.
Another consideration is the type of rate (variable or fixed)—do you want the certainty of repayments (but lose flexibility and miss out on taking advantage of lower variable rates), or would you rather have the uncertainty but flexibility that a variable rate provides? Variable loans offer more flexible options such as making additional payments and a redraw facility for someone looking for more features, while a fixed loan suits a person who is certain they can stick to a budget and are not interested in taking a chance with uncertain market conditions. However, take note that getting out of a fixed-rate loan before the term ends may cost you in break and discharge fees, as the lender seeks to be paid for the loss.
Get it right with refinancing your mortgage
Refinancing your mortgage is a big decision, however, it's not complicated if done the right way. You don't have to do it alone, as you can work with lending advisers to help you determine what you need and guide you through the entire process.
Using the expertise of Lending and Finance advisors means you get:
Help with finding optimal solutions tailored to YOUR circumstances
To save time and money, meaning more money for lifestyle or aspirations
Help sourcing the right loans, with the right rates. You'll get access to several options from lenders to find which one best suits you.
End-to-end management of the process