When you should consider refinancing your home loan – and when to stay put
Renovations, debt consolidation or fixed periods ending – there are many things that prompt people to refinance their home loan. Smart homeowners, however, take a more proactive approach. Here’s what you need to know.
Refinancing happens when you make a change to your home loan – either by changing the terms, the interest rate, or the lender. For most people who choose to refinance, there’s a trigger – they’re having another child and need that fourth bedroom, or their fixed period’s come to an end, and their home loan has gone onto the standard variable rate.
There’s no need to wait until you have to refinance, however – and the smart thing to do is look around and strike when the best deal’s available.
There are times when you probably shouldn’t refinance, and it usually comes down to the costs associated with getting out of your current loan.
“Most lenders will offer attractive headline rates to people looking to refinance,” says Pratham Karkal, Head of Personal Banking Direct at Macquarie’s Banking and Financial Services Group. “But you shouldn’t get carried away with that.”
Make sure you look deeper and compare the real cost of the loan.
Look at the loan’s comparison rate rather than the headline rate because that’s the real cost of servicing your loan. Also, pay attention to the standard variable rate (SVR) that your loan will revert to at the end of the honeymoon period, as it might be significantly higher.
The comparison rate will take into account ongoing fees, such as account fees and annual package fees. On top of this, you should also consider any upfront fees you’ll need to pay for switching, such as establishment fees, valuation and legal fees, and even lender’s mortgage insurance (LMI) or low deposit fees (LDF).
Then there are the potential fees from the lender you’re leaving. These might include discharge fees for ending your loan early and, if you’re on a fixed interest rate, a potential penalty – in the form of break costs – for ending your loan before the fixed term expires.
Karkal says that you should even look beyond the loan terms and consider your finances more holistically.
“Consider the other features you currently receive or are being offered too. Your loan may be bundled with other products such as credit cards or offsets with linked transaction accounts. Factor in the cost of replacing these too.”
When should you refinance your home loan?
In today’s market, there are many reasons for you to consider refinancing, says Karkal.
“It is a competitive environment for lenders,” he says.
“Banks are constantly introducing new product features to attract borrowers, and home loans are evolving.”
Banks are constantly introducing new product features to attract borrowers.
Karkal points out that, as well as lower interest rates, some home loans offer features such as multiple offset accounts, fee-free extra repayments, and the ability to have your salary paid directly into the loan. Each of these has the potential to save you a substantial amount of money and shave years off the term of a home loan.
“If you’re still on the same terms and your home loan has the same features as you had a couple of years ago, you should consider looking around for a better deal.”
What should you do before refinancing?
Before refinancing, you should contact your existing lender to see whether you can negotiate a better rate than you’re currently receiving from them or being offered elsewhere.
Karkal says that when you do, it pays to have evidence of the rate you’re being offered to use as a bargaining tool. “The more information you have about what other lenders are prepared to offer you, the better the deal you’re likely to get.”