Refinancing occurs when you move your home loan from your current lender to a new one. It’s a common strategy that people use when they want to borrow more money for a renovation or when they want to secure a better interest rate or better terms on their loan repayments. There are often costs involved with refinancing and it can sometimes leave you worse off, not better off.
The pressure of five consecutive interest rate rises has prompted record numbers of mortgage holders to refinance in recent months with the latest data showing $17.2 billion of refinancing had been completed in July.
Fixed or Variable Rate?
While we may have seen the bulk of the interest rate hikes, its likely that there are still more to go, which makes the decision on what type of rate to refinance to a difficult one.
The RBA has signaled it expects to raise interest rates further to quell inflation. It is indicated that at some point it will slow down with the rate hike however it is unclear when that will occur. Now is an important time to check the health of your home loan, particularly for those coming off fixed rates within the next few months.
Those that locked into low fixed rates during the pandemic will come off and will soon be reverted to another rate. Homeowners who are considering refinancing now have a difficult decision to make: stability and certainty with a fixed, more expensive rate, or going with a variable rate, knowing it is likely to keep going up.
What’s the downside to refinancing?
Refinancing involves setting up a new loan so you will have to go through the loan application process all over again. Although this can be now done over the phone, you will still have to supply all the supporting documents and you may not be approved. You will also involve a loan establishment fee and you will most likely be charged fees for cancelling your existing home loan.
What are the alternatives to refinancing?
There are alternatives to refinancing, which may be worth exploring before you make the decision to refinance. For instance, if your goal is to reduce your interest repayments, you could call your lender to find out whether you can negotiate a lower interest rate or have your repayments fixed for a period of time. This may work out cheaper than switching lenders.
You might also consider extending the term of your existing loan – which will lead to a lower monthly repayment. Alternatively, you may decide to explore switching to interest only for a short period, especially if your earnings drop due to parental leave or an absence from the workforce. Just be aware that both of these options will add to the cost of your loan over the long term and involve a credit decision from your lender.
What should I look for when I’m considering refinancing?
When you are refinancing, you are essentially taking out a home loan all over again and will need to do research on which home loan is right for you. When looking, make sure you check the comparison rate. This will give you a better idea of the real cost of switching loans because it reveals the rate of interest you’ll be paying when other fees and charges are taken into account.
What do I need to do once I’ve made the decision to refinance?
Once you’ve made the decision to refinance, you’ll need to go through the loan application process. This can take some time as it often requires having your property revalued. Even once you’ve been approved it may take a few weeks for your loan to be switched as it will have to pass through the internal processes of both your current lender and your new one.
The decision to remain with your loan or to refinance comes down to your own financial goals and personal circumstances. If you need assistance or would like to know more, speak to your financial adviser.
Your refinancing checklist
Before you refinance:
- Ask yourself why you want to refinance
- Do your research on what deals are available
- Speak to your existing bank to see what they can offer
- Examine the real cost of switching, including comparison rates and offset accounts
- Call your new lender and arrange the switch