Refinancing means replacing your current home loan with a new one. The new loan might be with a different lender or a new product with your existing lender. Done well, it can lower your costs or give you a loan that better fits your life. Done in a rush, the costs of switching can outweigh the savings.
Why people refinance
There’s no single right reason, but these are the most common:
- A more competitive rate. Lenders often offer sharper pricing to new customers than to existing ones. Over time, the gap can become meaningful.
- Better features. You might want an offset account, the ability to make extra repayments or a redraw facility that your current loan doesn’t offer.
- Lower fees. Some loans carry annual package fees or monthly account fees you may not need.
- A fixed rate ending. When a fixed period finishes, the loan usually rolls onto the lender’s variable rate, which may not be competitive.
- Consolidating debts. Rolling a car loan or credit card into your home loan can simplify repayments. It can also mean paying that debt off over a much longer term, so it needs careful thought.
- Accessing equity. You might want to borrow against the value you’ve built up for renovations or another purchase.
- A change in circumstances. A new job, a growing family or separation can all mean your loan no longer suits you.
The full cost of switching
Before you move, add up every cost, not just the headline savings.
- Discharge fee. Your current lender usually charges a fee to close the loan and release the mortgage.
- New loan fees. These can include application or establishment fees, valuation fees and settlement fees.
- Government fees. There are fees to register the new mortgage and remove the old one.
- Lenders mortgage insurance (LMI). If you’ll owe more than 80% of the property’s value with the new lender, you may need to pay LMI again, even if you paid it when you first bought. This alone can wipe out the benefit of a lower rate.
- Break costs. If you’re on a fixed rate, leaving before the fixed period ends can trigger a break cost. It can be substantial, especially if rates have fallen since you fixed, so ask your lender for a written estimate.
- Your time. Refinancing involves paperwork, a new application and a settlement process, usually over a few weeks.
A useful test is how long it would take for your savings to cover the switching costs. If you plan to sell or change loans again before that point, switching may not be worth it.
A word on cashback offers
Some lenders offer a cash payment to new customers who refinance. A cashback can help cover your switching costs, but it shouldn’t be the main reason you choose a loan. A loan with a large cashback and a higher ongoing rate or fees can cost you more over the years you hold it. Look at the total cost over a realistic time frame, and check any conditions attached to the offer, such as a minimum loan size or a time limit on settlement.
Watch the loan term
When you refinance, the new loan is often set up over a fresh 30-year term by default. That can lower your repayments, but stretching the debt out means paying more interest overall. If you’ve already paid down five years of your loan, consider asking for a term that matches the years you have left, or keep making your old repayment amount if the new loan allows extra repayments.
A note from Jenny Sometimes the right outcome isn’t switching at all. I often start by asking a client’s current lender to review their rate, and only recommend moving when the numbers clearly stack up after every cost is counted.
How a lending specialist compares your options
A lending specialist can look across a panel of lenders to compare your current loan against the alternatives. A thorough comparison looks at:
- the interest rate and comparison rate
- upfront and ongoing fees
- features you’ll actually use, such as an offset or extra repayments
- how each lender’s policy treats your income, debts and property
- the total cost of switching, including any LMI or break costs
- how long it would take to recover those costs.
Your lending specialist also handles the application and coordinates the discharge of your old loan, so the change is as smooth as possible. You can also test the numbers yourself with Moneysmart’s free mortgage switching calculator.
Make it an annual habit
Your home loan isn’t set and forget. Rates, fees and lender policies change, and so do your circumstances. Reviewing your loan once a year is a simple way to check you’re still on a competitive deal. Sometimes that review leads to a refinance. Often it just means a quick conversation with your existing lender that results in a sharper rate, with no switching costs at all.
This information is general in nature and does not take into account your objectives, financial situation or needs. Lending criteria, terms, fees and charges apply and vary between lenders. Speak with us for advice about your circumstances.