08 Oct 2018

When is the Right Time to Refinance?

when is the right time to refinance?

The right time to refinance, though somewhat guided by the fluctuation of interest rates, is mainly reflective of your personal and financial situation, and what you aim to achieve through restructuring your home loan. Many experts recommend getting a home loan health check every couple of years to ensure your loan still works for your lifestyle needs and financial circumstances.

The main reasons homeowners and investors refinance include:

  • To reduce payments and improve cash flow by switching to a lower rate
  • To take advantage of better loan features
  • To leverage the equity in your home
  • To switch from a variable to a fixed rate home loan (or vice versa)
  • To consolidate multiple debts into one low-interest rate loan
  • To move from a lender who is deemed unsuitable or lacking in service/reputation

Regardless of your reason for refinancing, making an informed decision is crucial. Start with a clearly defined goal and then establish a plan of action that will help lead to this.

When is the right time to refinance your home loan?

You know why you are considering refinancing your home loan, but when is the right time?

When interest rates rise or fall

If the interest rates are rising, you may find that your lender no longer has the most competitive rate. This could be a prime time to refinance your home loan to get a better deal and pay less in repayments.

Another option if interest rates are likely to rise or are at a low point is to switch to a fixed rate home loan so that when rates rise, yours don’t. A fixed rate loan can give you some degree of certainty that your repayments won’t change, so you can budget money easily. You should get to know all the facts on fixed rates to ensure it’s the right move for you.

Interest rates fluctuate regularly so it is vital that you have done your research. Jumping from one lender to another by following the lowest rate in the market may not benefit you in the long run. It’s always worth carefully considering the positives and negatives!

It’s crucial to keep in mind the comparison rate as well as the interest rate. Some banks and lenders may use a low-interest rate to attract attention to the loan, but it’s not always the lowest interest rate that gives you the lowest repayments – a higher comparison rate may hide the actual costs of the loan in the long run.

When your financial needs are changing

Whether you’re changing jobs or starting a family (amongst other reasons), it may be time to research loans with more competitive rates or features which may provide financial flexibility and potential savings.

If you have had a pay rise or come into more money but don’t have the flexibility of free extra repayments, refinancing to a loan which offers this or includes a 100% offset account could benefit you hugely.

Fixed rate loans could help when your finances are tight – with steady monthly repayments you can budget to make sure your mortgage is kept on track, and you won’t need to stress about rate rises during the fixed term portion of the loan.

Read our guide to keeping your mortgage payments on track if you want to get on top of your finances.

When you want to invest in property

If you want to invest in property, you could use the equity in your home as a deposit on an investment property. You can often refinance to leverage equity and get a lower interest rate at the same time.

When you have paid 20% of your loan

If you have more than 20% equity in your home, you will no longer need to pay any LMI (Lenders Mortgage Insurance). By refinancing your loan, you should be able to drop the LMI costs, saving you money on each repayment.

When you want to unlock equity to pay for big purchases

Home equity is the difference between your home loan balance and the current market value of your home. If the price of property in your area is decreasing, it may be time to access your equity before your home may depreciate in value. A home evaluation can be organised by our lenders to provide an estimate of the equity at your disposal.
Equity could be used to pay for your child’s education, or maybe a home renovation. You could even use your released equity to guarantee your child’s first home.

When you want to consolidate debt

By leveraging the equity in your home, you can pay off outstanding debts. Though you will need to borrow more on your mortgage to do so, your interest rate may be far less. You may find it easier to have a single monthly payment to manage and it can give you the opportunity to make extra repayments.

When you have job security

It can be tricky to start a new job and want to refinance your mortgage at the same time. Many lenders will see starting a new job as high risk, but once 12 months have passed, your job security will mean an easier transition to a new loan!

The cost of refinancing

Most refinance to save money, but it’s likely you will spend more on refinancing in the short term when you calculate the cost of fees. It’s important to do your calculations to ensure that refinancing is the best path for you.

Borrowing / Establishment / Package Fees

When you open a new home loan account, there may likely be costs involved. These include application and contract fees – one-off costs that could cost a couple thousand dollars. Though not all lenders charge a contract fee, most will charge an application fee.
Some lenders and loans charge an account fee, a monthly administrative fee. It’s important to be absolutely clear about the ongoing fees associated with any new loan.

Exit / Discharge fees

Luckily, excessive loan exit fees were banned some years ago, however lenders can still charge a one-off admin fee for exiting your loan, and you may also have to pay to obtain your title deed(s).

If you are exiting a fixed rate loan, you might be charged a break cost fee, which can fluctuate based on the amount of money and time left on your loan and other things like extra repayments. It is recommended you contact your lender to get a quote for this before you make any decisions.

Legal / Government fees

Some government charges are unavoidable when refinancing, like mortgage registration fees and title transfer fees. Stamp Duty may be charged for increasing the size of your loan, moving the property into someone else’s name, or investing in a second property.

Valuation / Appraisal

Valuations are formal processes where a qualified valuer assigns a true market value to your property. You may have to pay a fee for this report.

An appraisal is more of a ‘guesstimate’ of the property value provided by a real estate agent. Usually, this is not charged for, but as is not legally recognised you may want to take it with a pinch of salt.

We wrote more on whether the benefits of refinancing outweigh the costs earlier this year.

Is now a good time to refinance?

With interest rates rising among many banks and lenders, you may find that your once competitive loan is now falling behind others. It’s not recommended you jump ship as soon as you find a lower interest rate, as there are many other factors to consider, but it’s worth keeping an eye on other loans and getting a home loan health check.

It’s been suggested that 2018 and 2019 may be the year of the owner-occupier, with many choosing to renovate their homes instead of move. With stamp duty at a medium of $50,000, many first home buyers may not want to purchase their second home, when a renovated house may well add to its value – a great incentive in a currently decreasing market. It’s important to talk any decision through with your Lending Specialist before increasing your loan repayments.

What should you consider when refinancing your mortgage?

When refinancing your mortgage, it’s important to remember that the initial costs may be more than what you are paying now, even though your monthly rate should be lower.
You should also make sure you understand the economy and the real estate forecast – just because your rate has increased and another hasn’t doesn’t mean they won’t follow suit. It’s not guaranteed, but it’s better to know the general rate movements before you start the process.

Similarly, despite an interest rate being lower, you should consider the features you get with your current loan – or those that you know will be beneficial. Don’t fall for a low rate without taking into account its features and how the loan can provide financial flexibility – if your current loan has a 100% offset account which you use to your full advantage, you may not want to compromise on this simply to get a better rate.

Refinancing should not be done on a whim, and you should define clear goals and speak to a Lending Specialist to get a better idea of the positives and negatives of refinancing in your particular situation.

While there are many good times to refinance your home loan, there are times that aren’t so beneficial to refinance your home loan.

If you’ve had your current loan for a long time, you’re likely to be paying off the principal, and building equity. By refinancing you may switch back to paying interest, which won’t be in your best interest.

If you want to refinance to a lower rate, it’s recommended to establish how long it will take to break even. Breaking even after 36 months of refinancing may be a waste of time, money and effort if you are likely to sell your home within 5 years.

If your credit score is not in your favour, it could be a bad time to refinance. Most lenders may need to bump up interest rates for high-risk customers, and those with an unfavourable credit score may fall into that category.

When is the right time to refinance your commercial loan?

Most residential home loan reasons to refinance and the best situations to refinance in are mirrored in commercial property loans.

The difference is that often there is more flexibility with commercial loans – lenders may be more open to negotiating rates due to lower demand and heightened competition, offering discounts and waivers to fly ahead of their competition.

You may benefit hugely from negotiating a better loan deal, and you might not need to ‘shop around’ for the best loan as many banks and lenders will compete with your existing loan and negotiate a deal on fees.

However, more levels of documentation may be required, as well as documenting the financial picture of the business. Tax returns, cash flow records and financial statements are just some documents required. If profit is marginal then the lender or bank may also require a personal guarantee.

A valuation usually must show equity in the property for a bank or lender to provide a loan. The cost of refinancing may be offset by the savings you will make in the long run, and you might be able to negotiate a deal on paying less refinancing fees, but it’s imperative to determine whether it’s worth the time, money and effort you will put in.

Mortgage House

At Mortgage House, we’re no strangers to the homeowner’s journey. It’s a long (but rewarding) one.

But don’t worry, we can help with that.

If you’re thinking of refinancing your property, you can contact us on 133 144 for information about the best options for you when it comes to your mortgage.

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