Is it time to refinance?

May 2nd 2024 | Categories: Home Loans & Leveraging Equity | | Tags: Mortgage | Home loan | Refinance |

Exploring options to refinance? With a turbulent year of climbing interest rates behind us, now presents an opportune time to consider refinancing.

If you jumped into your homeownership journey and locked in a low interest rate a few years ago, there’s a chance you may be transitioning from your fixed period into a much higher interest rate.

But what exactly is refinancing? 

Refinancing involves replacing your existing home loan with a new one that offers better terms, such as lower interest rates, improved features, or more flexibility. This process may entail switching to a different lender who can provide you with a more cost-effective loan package. 

Some reasons why you might consider refinancing: 

1. You want to pay less. 

By securing a lower interest rate, you could save money and reduce your monthly repayments. Even a slight decrease in your interest rate could lead to substantial long-term savings. 

2. You want a shorter loan term.  

With interest rates at historic lows, you may have the opportunity to shorten the term of your loan without significantly increasing your repayments, enabling you to become debt-free sooner. 

3. You want access to better features.  

Refinancing allows you to access additional features such as unlimited extra repayments, redraw facilities, offset accounts, or tap into your home equity, providing you with greater flexibility and potential cost savings. Many lenders also offer a cashback incentive for choosing to do business with them.  

4. You want a better deal, more flexibility, or security.  

Switching to a different type of loan, such as fixed, variable, or split rate, can offer you improved terms and greater peace of mind. 

5. You want access to your home equity.  

Refinancing can allow you to unlock your home equity, which can be used to finance major expenses such as investments, renovations, or education costs. However, weighing the risks carefully before tapping into your equity is essential. 

6. You want to consolidate existing debts.  

Consolidating your debts into your home loan can simplify your finances and potentially reduce your overall interest expenses, especially if you have high-interest debts. 

Is refinancing worth it? 

Refinancing to a lower-rate loan can be the easiest way to save on monthly repayments, but the process does have a price. The average cost to refinance an owner-occupied home loan in Australia is around $800. That includes fees such as the discharge, application, valuation, documentation, legal and settlement costs. 

Using the table of the loan scenarios above, we can see that to recoup the average cost of refinancing within the first 12 months of making the switch to a lower rate on a $500,000 loan, a borrower with an existing average variable rate of 6.98 per cent would need to secure a rate discount of at least 0.21 per cent. 

Making the switch to a rate of 6.77 per cent would cut repayments by $67 per month or a total of $804 in the first year, which could be enough to cover the cost of refinancing. 

Before proceeding with refinancing, here are some important factors to consider: 

• Clearly define your refinancing goals and priorities to ensure that you’re pursuing the right loan package. 
• Assess whether the potential long-term financial benefits outweigh the upfront costs associated with refinancing, such as discharge fees, legal fees, and valuation fees. 
• Consider any application costs involved in switching lenders, including establishment fees, stamp duty, and lender’s mortgage insurance if applicable. 
• It’s advisable to communicate with your current lender before deciding, as they may be willing to renegotiate your loan terms to keep your business. 
• Be prepared for the application process, which may involve providing updated financial information and undergoing a credit assessment to determine your eligibility. 

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• The hidden price of building or buying a home

If you’re interested in exploring refinancing options, our lending specialists are here to assist you in evaluating your options and help you navigate the process with confidence. 

Simply complete the form below, and we’ll reach out to discuss your refinancing needs. 

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What you need to know: This information is provided by Invest Blue Pty Ltd (ABN 91 100 874 744). The information contained in this article is of general nature only and does not take into account the objectives, financial situation or needs of any particular person. Therefore, before making any decision, you should consider the appropriateness of the advice with regards to those matters and seek personal financial, tax and/or legal advice prior to acting on this information. Read our Financial Services Guide for information about our services, including the fees and other benefits that AMP companies and their representatives may receive in relation to products and services provided to you.