Refinancing your home loan: The pros, cons, and what you should do
Should you stick with your current home loan?
With interest rates low in Australia, many people talk about refinancing their home loans for a better rate. A mortgage loan isn’t a ‘set and forget’ type of product — numbers and rates are always changing, and there will always be a better rate out there for your needs. Before you consider switching from your current home loan to a new one, you need to understand what refinancing is and how it works.
What is refinancing?
Refinancing is the process of swapping out your current loan for a new one, often at a lower rate. Essentially you take out a new loan which pays off your existing loan(s), leaving you with just the new loan. Through refinancing, there is often a wealth of savings to be made, but there are times when it’s the right move and there are also times when it’s best to stick with what you’ve got.
When is it time to refinance your home loan?
When there are more competitive rates on the market
By actively monitoring and seeking out competitive rates you could save yourself thousands of dollars. By making the same repayments each month at a lower interest rate, you could pay off your mortgage sooner, making savings on interest payments. And if you keep paying the same amount each month you’ll be building your equity more quickly, as less will be going on interest.
Almost one in four Australians believe refinancing is a good idea for saving money on their mortgage, but say they can’t find a more competitive rate. At the same time, a recent survey by UBank found that nearly 85% of respondents couldn’t accurately recall their home loan rate. Searching for a competitive rate means you need to focus your attention and spend a little time searching – it may pay off in the long run.
You want the cash to make a large purchase
Many people look to leverage the equity in their house to extend their loans and use that cash injection to make large purchases. Common purchases made through refinancing include renovations, your child’s education, deposits on your next home or an investment property, investing shares or other opportunities.
You can access part of your built up equity, as well as potentially get a better rate and superior product. The amount you may be able to access through refinancing depends on the difference between the market value of your property and the remainder of your loan.
You want to consolidate your debts
Whether it be your car repayment loan or credit card debt, debt repayments for personal loans may become unmanageable due to their high-interest rates and unfavourable terms. If you find yourself struggling to meet payment deadlines for each individual loan it could be in your best interest to consolidate all of your debts into one. By refinancing your home loan, you can pay out your personal debts and be left with a single repayment at a potentially lower rate.
At first glance, rate discrepancies of 10%+ can make consolidation very appealing. But it’s important to look at the terms of your loan. For example, consolidating a 5-year loan at 15% into your home loan at 4% may seem like the logical option. However, spreading that repayment over 30 years could mean you are left paying far more interest than you would have with your original 5-year loan.
You want to buy a second property
With tax structures such as negative gearing, it can make sense to buy a second property with the equity you’ve built in your first home. Refinancing allows you to release this equity and expand your property portfolio. Not only saving money, you could also purchase your second house by using your equity.
When is it not time to refinance?
You have bad credit
Sometimes things happen in life, and your credit may have taken a turn for the worse since your last loan or perhaps it wasn’t so great to start. Regardless, refinancing with a bad credit score will mean you won’t get a competitive rate and you can end up paying overs on your interest.
Prepayment penalties and miscellaneous fees
One of the most important things to consider is how much it’s going to cost you to leave your current home loan and enter your new one. Since 2011, there’s been a ban on exit fees for variable rate home loans, however if your loan is from before 2011 you may still have to pay. Exit fee costs are traditionally 3-5% of the loan — which can be thousands of dollars — so you definitely want to chat to your lender about your proposed move. While exit fees have been banned, the Big Four still have legitimate administrative fees in place including:
- CBA charges $350 for Settlement Fee (discharge)
- Westpac charges $350 for Discharge Costs
- NAB charges $350 in Mortgage Discharge Fees and then $150 for Production of Documents (which permits registration from other parties)
- ANZ charges $200 if there is no change to the borrower and $350 if there is a change
You’re planning on moving soon after
Want to refinance but you also plan on moving house in the near future? Best to think again. This tactic could see you paying two sets of closing fees and any loan repayment savings you may have been able to leverage would be lost in the short term.
You don’t have a fixed source of income
Consider whether or not you’re going to have the income to pay off a long-term debt. Are you willing and ready to be working an additional 30 years from the time of the loan to make your repayments? Ensuring you have a reliable source of income is an important precursor to entering into any loan agreement.
Cashing out with your equity may seem like a good idea at the time but it can be dangerous, especially when your income may not be guaranteed. By relinquishing equity in your home, back to the bank, you open yourself up to the possibility of the bank taking your home if you are unable to make loan repayments.
How does refinancing work?
Step 1: Figure out the ‘why’…
You’ve got to figure out the ‘why’ before making this decision. Hopefully our list of reasons above can help guide you on your refinancing journey. Whatever the reason, be aware of the ‘why’ so you can make an informed decision and choose the loan that is right for you.
Step 2: Evaluate the costs
Also briefly touched on above, you need to find out if you have to pay any exit fees or penalties to your current lender, as well as any other costs associated with the loan. The fees will vary for each lender, so a good place to start is the Terms and Conditions of your current home loan contract. You should also chat to your lender too. When evaluating the costs, you’ll also need to factor in the cost of establishing your new home loan, how much you'll need to borrow for your new loan, and don’t forget to factor in any renovations, debt consolidation and any other expenses from your new lender.
Step 3: Find the right loan
Once you’ve figured out your reasons and evaluated the cost, it’s time to find a loan that ticks all your boxes. Make a list of the features that matter most to you and keep these in mind when choosing your new loan. Filtering lenders based on their list of features is available to you when you use Joust to refinance your loan. Home loans are a long-term commitment and the costs associated with chopping and changing means you want to ensure you get the right one.
Step 4: Apply to refinance
When you’re ready to refinance, why not try Joust? You can connect with experienced lenders and brokers to ensure you are getting great service and not wasting any time talking to different lenders or worrying if you’re getting the best rate and loan possible. All you have to do is fill out one simple form in 5 minutes and you have access to hundreds of lenders who compete for your business. Joust even works with the Big Four banks. Once you have filled out the form, our lenders and brokers will bid for your loan. Yes, they bid for your loan rather than making you do hours of research. This means you get their best offer, often with rates you won’t find elsewhere. If you are able to post your details during business hours you can even receive bids within minutes.
Step 5: Settlement
Congratulations! You now have a new home loan. Plus, you probably saved hours of time and thousands of dollars in the process. At this stage, you’ll have all the information you need to manage your new loan. After settlement, your new lender will ‘draw down’ on your loan — this is how your lender will pay off your old home loan using the funds from the new loan.
Ready to find the best home loan rate for your first home? See how Joust can help here.