The rates you got 10 years ago may not be the most competitive in the market anymore. When was the last time you did a loan-health check? Stay ahead of your lenders, and check if you’re paying more than you should!
There is no strict rule about how often you should refinance, but it’s always a great idea to shop around for better, cheaper and more flexible rates. This allows you to take advantage of what’s in the market, save money and adjust to your circumstance.
With the high interest rates, rental crises and property market changes, this is the big question that many ask: Is now the right time to refinance your loans? Here’s what you should know about refinancing to get the bang for your buck.
How does refinancing work?
When you refinance your loan, you take out a new mortgage to replace your existing loan. You can either refinance with your current lender or switch to a new one with a better deal.
This allows you to make smart adjustments that match your changing life situation. Whether you stay with your current lender or switch to a new one depends on your rates, options and goals.
Why should you refinance your loan?
You may look to save money, reduce the length of your mortgage or access features, such as an offset account or redraw facility. You can also consider refinancing if your current loan does not fit your personal or financial situation anymore.
Based on the Australian Bureau of Statistics, in April 2022 (seasonally adjusted terms), the external refinancing for total housing was $16.583 billion. In May 2022, it rose to $17.101 billion, which was 3.1% higher than the previous month and 16.6% higher than last year.
When should you refinance?
Some people refinance within months, and some take years. A lot can change during the life of your loan. Whatever your situation is, it’s best to check your rate and compare it to others to ensure you’re not missing out on better options and losing money.
To make things easier, we narrow down the benefits and drawbacks of refinancing:
PROS OF REFINANCING
1. Lower interest rates: If you check your current rate, chances are you’re paying more than you should. The market is highly competitive, so sticking to one lender may not be your best option. If you refinance to a lower rate, you’ll pay less interest over the lifetime of your loan.
To put it simply, if your current lender charges you 4% on a $500,000 loan, your monthly repayment is $2,388. If you manage to switch to a lender with a 3.5% rate, your monthly repayments change to $2,246, which means you save $142 per month.
You can also weigh your options between fixed or variable rate loans. A fixed rate may be higher, but it provides security while a variable rate offers flexibility.
2. Loan terms: A lot can happen over the life of your loan, so refinancing to an option that matches your situation may help you cope with the changes.
For instance, if you get an income increase, you can up your repayments and shorten your loan term. This way, you save money by paying off your loan early.
However, you can extend your loan term if you’re short on your budget. This allows you to stretch your repayments, thus lowering the per-month costs and making it more affordable for you.
Want to know how much you pay and can potentially save with a lower rate? Calculate your repayments with just a few clicks.
3. Better loan features: Refinancing allows you to access and take advantage of more features, such as an offset account or redraw facility.
If you have equity in your home, you can tap into this equity and use it for big-ticket items, like another property, a car, or a holiday. You can also potentially use that equity to cover other debts, such as student, personal, credit card or car loans.
CONS OF REFINANCING
1. Complicated paperwork: Refinancing can be quite a hassle. With the documents that are now needed, banks have made it much more difficult to be able to refinance your home loan.
2. Additional fees: Most lenders charge you when you refinance. For example, some banks may include discharge fees or transfer fees if you move to another. There can also be break fees incurred if you refinance from a fixed rate.
3. Increasing rates: You may score an appealing introductory rate when you refinance, but some lenders may increase your rates in the years ahead.
What should you consider before refinancing?
Like any financial decision, refinancing requires a lot of thinking. One decision can either cost you or save you thousands on your repayments. Joseph Daoud, It’s Simple Finance Founder & Managing Director, provides a checklist of questions you can ask yourself before you refinance:
1. Assess your situation: Before you decide to refinance, you should evaluate your current circumstance. For example, what has changed in your life since you took out the loan? Can you still keep up with your rate and term?
2. Evaluate your property: Check if your property increased or decreased in value. If you have less than 20% equity in your home, you may need to pay the lender’s mortgage insurance (LMI).
3. Compare your options: There are plenty of lenders out there. After assessing your personal and financial situations, identify your goals. Then, consider what features and benefits are ideal for you.
4. Consider the costs: As mentioned, refinancing involves fees. Whether you need to pay break, discharge, transfer, or any other fees, adding all these charges may cost you thousands.
5. Talk to brokers: To avoid the stress of assessing lenders, documents and negotiations, you can talk to brokers as they have more experience and better relationships with lenders.
Refinancing may be quite complicated because it involves confusing paperwork and negotiation. To make it simpler, get in touch with our lending specialists for free and have a hassle-free journey. We’ll do the hard work for you from assessment all the way to settling your ideal rate!
Here are some tips from Daoud on what you should do when you decide to refinance. Understanding these tips may help make the process easier and faster:
Daoud also says that ‘switching lenders right away is not always an option — it’s best to get in touch with expert brokers to help them evaluate their best choices.’
Want to switch to better rates?
You should make informed decisions before switching loan options. Making smart adjustments allows you to reap more rewards and be in a better financial position.
One click can save you thousands on the life of your loan. Chat with our expert brokers for free, and we will gladly assess your situation. Get tailored advice that suits your circumstance and financial goals.
You may also get more options, better rates and cashback offers from our selection of over 40 banks and lenders, so you get to save more on your repayments!
Got a question? You can always ask with just one click!
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Stay tuned for our upcoming blogs about what you should consider before buying your first home!