When you should consider refinancing your home loan – and when to stay put

Tips

Renovations, debt consolidation or fixed periods ending – there are many things that prompt people to refinance their home loan. Smart home owners, 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.

As well as being able to reduce your monthly payments, refinancing can give you access to a whole host of other benefits.

Here are the things you should consider.


When shouldn’t you refinance your home loan?

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 lenders 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.”

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 of 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.”

Take our refinancing readiness quiz and talk to your mortgage broker about your refinancing options.


How does the refinancing process work?

Greater competition among lenders hasn’t just led to lower interest rates and better products, it has also made the loan application process much more straightforward.

Today, refinancing can be a relatively painless process with less paperwork than you might think.

It’s quick and easy to apply for refinancing online, and in no time at all you will be enjoying all the benefits of your new home loan.

Key takeways

  • Don’t wait for a trigger to refinance.
  • View the home loan offer holistically, rather than on interest rate alone.
  • Talk with your bank or your mortgage broker about the pros and cons of refinancing now.

Take a proactive approach to your home loan – speak with one of our home loan specialists today by calling 13 62 27.

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Unless stated otherwise, this information has been prepared by Macquarie Bank Limited ABN 46 008 583 542 AFSL and Australian Credit Licence 237502 and does not take into account your objectives, financial situation or needs. You should consider whether it is appropriate for you. All applications are subject to Macquarie's standard credit approval criteria.