When Is the Best Time to Refinance?

November 24, 2017


How do you know when it is the best time to refinance? In Australia, homeowners tend to refinance every four to five years in search of a better deal. The idea is that you can save on the cost of your mortgage if you are always working with the most suitable loan for you on the market regarding interest rate, features and loan term. Whilst you may not want to refinance once a year, it is worth it to evaluate your current loan about every 12 months to make sure you aren’t missing out on a better deal.

On the other hand, refinancing isn’t free. The fees and charges involved often mean you won’t achieve any savings until you’ve paid down your new loan for a certain period of time as the lower repayments are offset by refinancing costs.

When can you benefit enough to make the costs of switching to a new loan worth it? Here are the important factors to look at to help you figure out if now is the best time to refinance.

How Much Could You Save on Interest?

The most common reason people refinance is to get a lower rate to potentially save thousands, or even tens of thousands over the course of a mortgage, depending on the details of their current and new loan. Take a look at your rates and the rates on the market that you may be eligible for. If you could refinance to a loan that is at least 1 to 2% lower, you’re likely to save enough to make it well worth it, despite the costs involved. Even if there isn’t a significant spread between loans, you may still have other reasons to refinance to make it a financially lucrative decision.

Are You Considering a Home Renovation Project?

If you are planning on renovating a part of your home, such as finally upgrading that outdated kitchen or giving your bathroom a makeover, you are going to have to finance the cost of the renovation. A lot of homeowners refinance to help them pay for renovation costs. You can refinance your loan, ideally get a lower rate, adjust the term of you need to, and add $20,000 or $30,000 to the loan so that you can use the money for an upgrade. This way you can use your low-interest mortgage rate to fund your project.

Are You Thinking of Investing in Property?

If you have paid down a sizable chunk of your mortgage and are in a good position financially, you may be considering property investment. Purchasing a second property to rent out can be an excellent way to secure your future, giving you more income during your retirement. This is a financial move you’ll want to make with the help of your financial advisor and a mortgage specialist to make sure you don’t take on too much risk. However, by using the equity you’ve built up in your home and refinancing, you can gain a lot.

How Much Could You Save if You Consolidated Your Debts?

How much are you paying a month right now in all your non-mortgage interest payments? Take a calculator out and add up the numbers. Now, how much would that interest amount go down if your debts were rolled into your low mortgage rate? It may be the best time to refinance if you can save – and simplify your monthly bills – by refinancing so that you have enough to pay off your other debts.

Do You Have a Fixed or Variable Rate Loan Right Now?

If you are paying down a variable rate loan right now, then you can refinance without having to pay any break costs. If there is a lot of talk that the cash rate may go up over the next year, or that banks may raise rates, refinancing now to a lower fixed rate loan may be a smart move. Just keep in mind, no one can predict if rates will go up so don’t refinance solely based on an assumption that rates may go up. They may not.

If you have a fixed rate loan right now, you’ll probably have to pay extra fees to leave your current loan. Make sure you find out what those fees are and factor them into your total refinancing costs.

Have You Had any Recent Changes to Your Income or Credit?

This is an essential consideration that many property owners may overlook until they talk to a mortgage broker. How good of a position are you in to apply for a new loan? Ideally, you’ve been in your current job for more than two years and have a clean credit file. If you just got a new job this year, even if it is a higher paying one, or if you just opened a new credit card and took out an auto loan, you may want to hold off on refinancing. You don’t want to walk into a situation where you don’t qualify for the loan you want, simply because there are a couple of recent changes to your finances.

Are You Struggling with Your Budget?

One of the advantages of refinancing is that you may be able to lower your monthly repayments quite a bit by refinancing to a longer term. Keep in mind this will increase the amount of interest you’ll pay overall as you’ll be making repayments for longer. However, if you are struggling to keep up with all your bills and are starting to put purchases on your credit card without being able to pay them off, lower mortgage repayments could give you the breathing room you need and prevent you from getting into credit card debt or going into arrears with your mortgage.

Could You Benefit from the Features of a New Loan?

A lot of new homeowners start out with a basic variable rate loan as it offers a low rate, but not a lot of features. As you may be making more now than when you first bought your home, and thereby have extra income, you may be more interested in using features like unlimited free repayments and a free offset account to help you repay your loan faster. Look at the features in your existing loan and see if refinancing may help you benefit more than you are now.

Have You Talked to a Mortgage Professional?

Refinancing could help you save money, meet financial goals, and simplify your financial life. Still, there are a lot of factors that go into getting an ideal loan product when you are ready to refinance. Take the time to compare loan products and speak to a mortgage broker or other specialist to make sure you know about the best deals out there, depending on what you are looking for in a refinanced loan.

Written by Refinancing.com.au

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