Finance

How often should you refinance your home loan?

By Kathryn Lee  |  7 Apr, 2021

When was the last time you compared your home loan rate to others on the market? If you can’t remember, chances are it’s time to have another look.

Over recent years, interest rates have experienced a tail-spin dive. And while borrowers with eyes skyward’ have been reaping the rewards through refinancing or switching to lower rates, others have been more complacent.

A model house with calculator and coins representing the savings to be made through refinancing.

According to RBA figures, in July 2019 the average interest rate on a new owner-occupier variable rate home loan was 3.50% p.a. Now, just over 18-months on, the average interest rate on this loan type is 2.80% p.a.

As highlighted in the Australian Competition and Consumer Commission’s (ACCC) recent inquiry into home loan pricing, borrowers could stand to save thousands through refinancing to a lower rate.

the average interest rate paid across home loans (owner-occupier and investor) originated in 2019 was around 40 basis points lower than the average interest rate for home loans originated in 2015 or earlier, the report stated.

To put this difference into perspective, it means a borrower with a $250,000 home loan would pay about $1,000 in extra interest over one year.

ACCC Chair Rod Sims said the savings could be substantial for those who investigate switching.

A significant number of Australian home loan borrowers have not switched lenders for several years, yet they stand to save so much money by doing so, he said.

1. Who should consider refinancing their home loan?

Borrowers come from all walks of life and choose to refinance or switch their home loan for a variety of reasons. Here are some of the common ones:

1. Your home loan is over three-years old

The ACCC’s recent inquiry into home loan pricing found that borrowers with old home loans tend to pay more in interest than those with a newer home loan.

In its final report the watchdog noted that in September 2020, borrowers with home loans between three and five years old paid an average 58 basis points more in interest compared to borrowers with newer loans.

If you are someone with an older loan, you might be surprised to know that borrowers with new loans are likely walking into the very same lender you have your loan with and getting significantly lower interest rates, ACCC Chair Rod Sims said.

2. You want to save money in repayments

If you are looking to cut costs, refinancing is a worthwhile consideration. While not beneficial for everyone, if you are eligible for a more competitive loan product it can significantly reduce expenses.

Refinancing however, may not be beneficial if the cost to break your current home loan outweighs the cost-benefit, or if your current loan product is already competitive.

3. Your home loan interest rate starts with a three’

If your home loan interest rate begins with a 3′ or higher, it could be a sign that your current home loan isn’t competitive to what else is on the market.

4. You have outgrown your current home loan features

Although useful, home loan extra features can have different degrees of usefulness, depending on the circumstances and needs of the borrower.

For example, while some might find an offset account highly beneficial and in line with their goals, others may find it a waste of time. Since this feature often comes with a price premium, in this case it could be worth looking at other products.

5. You want extra funds to renovate

If lockdown restrictions too made you start looking at your home differently, refinancing could give you those extra funds needed to renovate.

You might also like: How to Refinance to Renovate Your Home

2. My interest rate is too high what should I do?

If you have compared your home loan to what else is on the market and found your interest rate is too high, you have a few options.

The first is to consider asking your lender for a lower rate. If your lender agrees to a suitable figure, this can allow you to lower your interest rate without needing to switch home loan providers.

If asking your current lender for a reduction isn’t a feasible option, borrowers can also investigate refinancing or switching. This involves looking at what else is on the market and moving to a different product and lender.

You might also like: 6 Key Home Loan Refinancing Questions Answered

3. Should I consider switching to a variable or fixed rate?

Choosing between a variable or fixed-rate mortgage is a personal decision and should be made based on the individual circumstances of the borrower. There are, however, a few generalisations that can be made to potentially help guide the decision.

Benefits of a fixed-rate:

  • Know what to expect. Borrowers on a fixed rate can budget repayments for a confirmed period without worrying about fluctuations.
  • Protect yourself from rate hikes. For as long as the fixed-rate period stipulates, borrowers on this loan type don’t need to worry about a sudden rise.

Benefits of a variable rate:

  • Cash rate cuts. Take advantage of when RBA cuts to the cash rate are passed on the borrower interest rates.
  • Flexibility. It’s often easier for borrowers on a variable interest rate to refinance to another product without so many fees. For example, in most cases fixed rate borrowers will have a break fee’ to contend with.
  • Extra features. Variable rate home loan holders often have access to more extra features than their fixed rate counterparts. For example, many lenders will give borrowers on this loan type access to making extra repayments or give them the use of an offset account or redraw facility.

4. What are the costs of breaking my current loan to refinance?

Costs associated with breaking your current loan to refinance can vary. Every lender has different criteria and cost, so the terms of your loan should be checked for a precise answer.

According to Canstar, it can cost an average of $750 or more to refinance a mortgage. This, however, should be compared the benefit of any potential savings.

You might also like: The cost of breaking a fixed rate home loan

5. How long does it usually take to refinance?

There is no standardised length of time a refinance should take; however, the process usually takes between two to four weeks.

The process generally involves a variety of steps and is not entirely dissimilar to the process of applying for your current loan.

Generally, it will involve selecting and applying for the new loan, including completing any necessary paperwork or in some cases, getting a new property valuation; completing a Discharge Authority form with your current lender and once its all approved, paying out your current lender.

Words by Kathryn Lee

Sources:

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