Refinancing a home loan can be one of the shrewdest moves a borrower can make, says Adelaide mortgage broker Hayley Walsh.
People shop around for the cheapest petrol, the cheapest gas and electricity deals and the cheapest broadband plans.
Refinancing is akin to shopping around for the cheapest home loan – or perhaps one with features which are better suited to your scenario.
It’s something that every homeowner should at least explore at regular intervals as their circumstances change, interest rates fluctuate and new offers hit the market.
But the timing has to be right. And refinancing isn’t always the answer.
Let’s take a closer look.
What is refinancing?
Refinancing is the process of changing your mortgage from one account or bank to another.
People usually refinance when they wish to take advantage of lower interest rates but they may also be attracted to loan packages with additional features.
Or they may be consolidating debt. Adding your car loan and credit card debt to your mortgage and taking advantage of cheaper home loan rates is a very prudent strategy and will save you thousands of dollars.
There are two main types of refinancing:
Internal refinancing – this is when you refinance your home loan with your existing lender.
External refinancing – this is when you switch to a new lender.
Refinancing is extremely common and grew to record levels in Australia during the start of the pandemic in 2020 as homeowners looked to take advantage of plummeting interest rates.
Many will have been on fixed term loans and wished to switch to cheaper variable rates.
Is refinancing worth it?
Refinancing at the right time can save you tens of thousands of dollars and cut years off the term of your loan.
Even a small saving in interest rates can make a massive difference over the term of a loan.
Let’s say the McDonald family take out a $500,000 mortgage over 30 years and fearing rising interest rates, lock in a five-year fixed rate at 6.8%.
Their monthly repayments will be $3,259.
Now, if three years into that five-year term interest rates reach their peak and begin to fall, the McDonalds might need to consider refinancing.
A rival bank offers a variable rate of 4.5% for new customers.
By refinancing, the McDonald’s monthly repayments fall to $2,533.
They stand to save $726 a month or $17,424 over the final two years of their fixed loan.
But that won’t take into account the break costs and exit fees payable to their first lender for breaking the terms of their fixed loan.
The reality is, it may still be worth it but that’s why the sums need to be done and the pros and cons closely assessed.
The pros of refinancing
Lower interest rates – It’s why most people refinance. It’s all about saving money and reducing the life of your loan.
Debt consolidation – Taking advantage of the cheapest rate by switching all of your debt into your home loan makes smart financial sense.
Equity access – Refinancing gives you access to the equity in your home. This may be used on renovations, holidays, buying a new car or perhaps reinvesting. But the more equity you have, the lower interest rate you are likely to be offered.
Flexibility – Refinancing allows you to change the terms of your loan. Increasing the duration of your loan will reduce your regular payments but extend them over a longer period. Decreasing the duration of your loan will increase your payments but reduce your total interest bill.
The cons of refinancing
Fees – You won’t be able to break a mortgage without paying a raft of fees including loan exit fees, valuation fees, application fees and break fees. Some of these will be negotiable and may be waived if you remain with your lender but switch to a new package. It’s wise to investigate any potential fees before taking out a loan, particularly if it is a fixed-term loan.
Lenders Mortgage Insurance – This can be a nasty one. If you have less than 20% equity in your property, you may need to buy Lenders Mortgage Insurance (LMI). This protects the lender if you default on your loan but could be a very expensive add-on to the costs of refinancing.
Credit Score – Every time you refinance, your credit application is recorded on your personal credit file. Refinancing your home loan multiple times can ultimately affect your credit score which could make it more difficult to take out loans and be offered the best rates in the future.
Get advice today
Regularly reviewing your home loan and considering refinancing makes good sense.
But everyone’s circumstances and financial goals differ.
If your employment has changed or if you plan to sell your house in the near future, refinancing may not be the best idea.
Calder Finance Broking are specialists in the business of home loans and refinancing in Adelaide and across South Australia.
We pride ourselves on leading our clients into the future with structure, financial stability and confidence.
Contact us today to get started, and discuss all of your finance needs and concerns.
The information contained in this article is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser.
Taxation, legal and other matters referred to on this website are of a general nature only and are based on Calder Wealth Management’s interpretation of laws existing at the time and should not be relied upon in place of appropriate professional advice. Those laws may change from time to time.
Calder specialises in wealth management with a focus on advice, investment, sustainability, insurance and finance.
Written by Hayley Walsh from Calder Finance Broking, for more information please visit the Calder Finance website. Please note that Calder Finance Broking Pty Ltd is a Corporate Credit Representative of BLSSA Pty Ltd ABN 69 117 651 760 ACL 391237.