To save money, refinancing their mortgage is something many homeowners consider.
However, knowing why to do it and, more importantly, when is not always easy to determine. Mainly because it often depends on factors like your circumstances and other market forces.
The home loan market is very volatile and therefore changes regularly. Subsequently, lenders regularly modify their interest rates and loan terms, add in or amend new features and generally try and enhance the attractiveness of their products in the eyes of their customers.
So, in this article, we will give you a brief rundown of when is a good time to refinance your mortgage and when is not.
Regardless of whether you have held your existing mortgage since you got it or the circumstances around your finances have changed, it is worth reading until the end to determine what your options are.
How soon is too soon to refinance a mortgage?
In the first couple of years after obtaining a mortgage, there is a bit of a myth that it is ‘too soon’ to refinance. Essentially, you can refinance at any time – even the next day after having a mortgage approved, in theory.
You can learn more about refinancing here, but the most important factor to consider is the cost of refinancing. You should only refinance when there is a significant financial benefit in doing so.
However, as there are costs involved in refinancing, you will need to thoroughly evaluate whether it is a financially viable exercise to undertake. You don’t, after all, want to lose money.
It is worth noting the more you refinance, the more suspicious a lender may get. So, it might become harder to secure another one if you plan to do it again soon after securing a new deal.
That said, it might be a good idea to have your loan terms reviewed on an annual basis. Especially if you engage the services of a mortgage broker. Additionally, if the interest rates drop, that could also be a good time to explore new options.
When to refinance your home loan
As a rule, homeowners refinance to save money through one or a combination of four different ways.
Two of the main reasons are to refinance for either a shorter length term or a lower mortgage rate. However, you may also choose to consolidate your debts or cash out.
It is important to understand what you are hoping to achieve by refinancing, as this will help you find a home loan provider who best offers what you are looking for.
The initiation of the process of refinancing depends on your financial and personal circumstances. However, below is some further information about when it might be an appropriate time to do so.
To get a lower interest rate
Many people who refinance choose to do so to achieve a lower rate of interest. Clearly, the higher the interest rate of your home loan, the more expensive it will be in terms of repayments.
However, before you decide to switch lenders, it is worthwhile checking out what rate your existing lender offers to brand-new customers. Sometimes they might let existing customers automatically change to that rate for fear of losing them. Doing this would be handy for you as it would mean you would not need to do a full refinance.
On other occasions, you might want to refinance because another lender is advertising a lower rate of interest. While this will undoubtedly save you money, it might not be the best option if it does not provide other features. They might include payment holidays, redraw facilities or the ability to make extra payments which are all something you can benefit from further down the line.
To obtain better loan terms and features
If you have had your existing mortgage for a while, it is a fair bet your circumstances are different now to when you first secured it.
For this reason, it is sometimes worth refinancing to a home loan that better reflects your current position.
For instance, if you have managed to build up significant savings, opening an offset account can be a terrific way of reducing the interest charges of your home loan. Alternatively, having a redraw facility will enable you to make extra repayments, which you can access later if you need too.
To reduce the mortgage repayment term length
Another popular reason why people refinance is to reduce the terms of their loan repayment.
Generally, borrowers do this when their income has risen by a sufficient enough level to manage the monthly repayments.
At these times, it is worth being conservative about what you can afford to do – just to offer a little bit of protection should your circumstance change again. However, if you do decrease the term length, it means you will be able to own your home a lot sooner and pay less in the way of interest too.
To access cash
If you have managed to build up some equity, refinancing is an option when it comes to accessing some of that capital.
It is particularly useful if you want to complete renovations and other home improvements. It is also a shrewd way to invest in a rental property too.
For those with several debts to manage, refinancing can be a very good way to streamline them by incorporating them into your home loan.
It means that instead of trying to make repayments for credit cards, personal loans and car loans on top of your home loan, you can consolidate them all into one monthly repayment.
The beauty of doing this is that all debts will be charged at the rate of your home loan, which can save you a significant amount of money on interest.
To switch lenders
Some homeowners decide to refinance just so they can switch to a new lender.
From a home loan perspective, the main reasons for doing this are to receive a better rate of interest or access home loan features that are more useful to them.
However, for those people who are unhappy with the level of customer support they are getting from their existing provider, their primary motivation for refinancing might be to receive better communication and service overall.
Refinancing to reduce fees
In today’s marketplace, most lenders offer either zero-fee home loans or those which are very low-fee.
If you discover you are being charged several different fees, it might be time to refinance.
Just be aware that other lenders who don’t charge fees absorb these costs through higher interest rates instead. So be sure to do your homework on whether you are getting a good deal or not.
When should you not refinance your home loan
There are several benefits that can be enjoyed from refinancing. However, it is also worth noting there are some occasions when it is probably not a good idea to do so.
These might be as follows:
When refinancing costs are high
Sometimes there are costs involved in refinancing due to government legislation, brokers fees or legal fees, which is something to consider as the amount will vary depending on your circustances.
Those with a home loan that is a fixed rate will need to weigh up the viability of refinancing, as there may be break fees involved in doing so.
Also, as set-up costs are involved in refinancing to a new deal, these might cost you more than what you stand to save.
LMI is required
Those who want to refinance have more chance of being able to do so if they have 20% equity in their home.
If they don’t, then it means they will be borrowing 80% or higher on their property’s market value. It could thus result in them having to pay for LMI – otherwise known as lenders mortgage insurance or you may have to consider a bridging loan if you’re transitioning.
It is important to note that even if you paid LMI when you originally bought your home, it might still apply when refinancing. So should this be the case, it might not be worth doing so.
I'm a financial expert with extensive knowledge in the mortgage and home loan market. I've worked closely with various lenders and borrowers, analyzing market trends, interest rates, and loan terms. My expertise extends to refinancing, helping individuals make informed decisions to optimize their financial situation.
Now, let's delve into the concepts mentioned in the article about when to refinance a mortgage:
Timing of Refinancing:
- Refinancing can be done at any time, even shortly after obtaining a mortgage.
- The key consideration is the cost of refinancing, and it should only be pursued when there is a significant financial benefit.
Frequency of Refinancing:
- While there's no strict limit on how often one can refinance, frequent refinancing might raise suspicion with lenders.
- Annual reviews of loan terms, especially with a mortgage broker, can be beneficial.
Reasons to Refinance:
- Lower Interest Rate:
- Refinancing to achieve a lower interest rate is a common motive.
- Checking existing lender offers for new customers and exploring other lenders for better rates is advisable.
- Better Loan Terms and Features:
- Refinancing to align the loan with current financial circumstances.
- Features like offset accounts and redraw facilities can be essential.
- Shorter Loan Repayment Term:
- Refinancing to reduce the length of the loan repayment term.
- Typically done when income has increased to manage higher monthly payments.
- Access to Cash:
- Using built-up equity for renovations, home improvements, or investing in a rental property.
- Debt Consolidation:
- Streamlining multiple debts into the home loan for easier management.
- All debts charged at the home loan rate, potentially saving on interest.
- Switching Lenders:
- Refinancing to a new lender for better interest rates or more suitable features.
- Reducing Fees:
- Exploring refinancing options if the current lender charges high fees.
- Caution: Some lenders might compensate for zero fees through higher interest rates.
- Lower Interest Rate:
When Not to Refinance:
- High Refinancing Costs:
- Government legislation, broker fees, legal fees, and potential break fees for fixed-rate loans are factors to consider.
- LMI Requirements:
- Refinancing may not be advisable if it involves lenders mortgage insurance (LMI) costs.
- Having 20% equity in the home is preferable to avoid additional expenses.
- High Refinancing Costs:
Understanding these concepts can empower homeowners to make informed decisions about when to refinance based on their specific circumstances and financial goals.