Should I refinance my home loan? Why now is a good time to refinance?

Refinancing could save you thousands depending on the terms of your arrangement, so it pays to do your homework before taking on a new home loan. 

  7 minutes

With economic uncertainty due to COVID-19 and interest rates at record lows, refinancing your home loan may be a way to save money on your monthly repayments, free up some cash or pay for that renovation you have been dreaming of. 

What is refinancing?

In basic terms, refinancing is replacing your current home loan with a new one that is more aligned with your personal circumstances and financial objectives. Exploring the option to refinance every two to three years can serve as a ‘home loan health check’ to make sure you are getting the best option available to suits your needs.

Even more reasons to consider making a change

Depending on your personal circumstances and what you want to do with your money, refinancing can help you: 

• Get a better offer on your existing loan - through lowering the repayments on your existing loan or saving on the overall cost of the loan by finding a more competitive option; 
• Consolidate your debt - if you have credit cards, a car or personal loans you may be able to fold these into your home loan and save on interest repayments; 
• Renovate your property - refinancing can allow you to borrow extra funds to add an extra room, build your dream kitchen or revamp your garden - all of which could add thousands in value to a property you already own. What's more, with the Federal Government's Home Builder grants of up to $25 000 (available to eligible owner-occupiers1), you could stretch your budget even further on building contracts signed before 31 December 2020; and 
• Unlock equity - refinancing may also help you access the equity in your current property to borrow funds to buy an investment property or just have extra funds available if you need them. 

Refinancing checklist

Although the mortgage market is currently very competitive, refinancing your home loan can be a complex process. So, it is important that you understand what is involved and if refinancing is the best option for your personal circumstances. Here are some tips on where to start: 

• Ask yourself why you want to refinance. When it comes to refinancing, individual circumstances are more important than just a good mortgage rate. Whether you want to unlock equity, invest in a new property ,renovate your home or just get a better deal; you’ll also need to decide whether your goal is to reduce your monthly payments, pay less interest over the length of the loan or simply pay off your loan faster. Taking these factors into account will help you determine which home loan product best suits your needs. 
• Do your research. Look around at what deals are available. Make sure you compare the interest rates and the term. There are a number of different home loan products available ranging from basic loans that offer a lower rate of interest without complex features and additional benefits compared to more comprehensive banking packages with slightly higher interest rates but they provide more flexibility in terms of offset and redraw facilities. Alternatively, you can set up an offset account to reduce the interest you are paying on your loan – the larger the offset, the less interest you will pay over the lifetime of the loan. If you want to pay off your loan as fast as possible, look for a home loan with the shortest term with repayments you can afford.
• Speak to your existing financial specialist first. Changing lenders can be far more complex than just switching to a different home loan product with your existing bank, so it always pays to ask if you can get a better deal where you are. Our needs change as we grow older, so life events – like starting a family, moving from an apartment to a house or downsizing – can mean that a home loan that was suitable a couple of years ago may no longer be the best option for you.   
• Examine the real cost of switching. Although you can save money in the long-term, there are other factors to consider that may add to the cost of switching. Be careful of introductory offers that charge a low rate for the first one to two years but then roll over to a much higher interest rate. You’ll also need to check your existing contract to ensure that you are not up for discharge fees or break costs on fixed loans. Refinancing may also have an impact on your tax deduction (so do consult your accountant) – for better or worse, make sure you check whether your home loan interest deduction will go up or down.
• Know how your numbers stack up. Lenders will look at factors like how much equity you have in your property, whether property values have gone up or down since you invested, what your debt-to-income ratio is and how good your credit score is. If you have less than 20 per cent equity in your property, refinancing might be expensive and you may also need to take out Lender’s Mortgage Insurance (LMI), adding to the overall cost of the loan. You will also need to know what your break-even point is – i.e. the point at which the costs of refinancing have been covered by your monthly saving – and whether you plan to keep the property for long enough to benefit from refinancing. 
   

Making the switch

Taking into consideration the points above, it is important that you do a thorough cost-benefit analysis before refinancing. If it is all a bit beyond you, you can ask your bank or a reputable broker to do the legwork for you. Once you have done your homework and decided that the move will be worth it, making the switch is as easy as calling your lender to organise the paperwork.

To find out about how BOQ Specialist can help you with your home loan needs, click here or call 1300 160 160. 

Resources

¹ For further information on the Federal Government’s HomeBuilder grant, including details about the eligibility criteria, please visit https://treasury.gov.au/coronavirus/homebuilder