Committing to a home loan refinance is an exciting decision that may open you to several financial benefits and incentives.
However, deciding to refinance is one thing, but knowing when you can refinance a home loan can be just as integral to your financial future.
On this page, we discuss the best times to refinance your home loan to ensure you gain the most financial benefit.
In short, refinancing means switching your home loan product, whether with your same lender or a new one.
There are plenty of reasons why people do this, which can include:
There is no set time limit on your home loan before you're eligible to refinance.
In other words, you can exchange your current loan for a new one at any time.
However, ending your home loan shortly after your approval can come with significant refinancing fees, which could prove more detrimental than beneficial. This is particularly important to know if you have a fixed-rate mortgage, as leaving the loan early will incur break fees that can be quite expensive.
In the face of refinancing expenses, some lenders may offer a loan cashback, which can be used to cover some of these fees. Although, not all lenders offer this, so there is no guarantee these bills can be covered.
Refinancing can also negatively impact your credit score, making it more difficult to find a new loan that suits you and your needs.
Therefore, you must assess the pros and cons of refinancing before committing to ensure that you will not open yourself to financial vulnerability.
No rule restricts you from refinancing your home loan multiple times, even within the same year.
You can even utilise a fast refinance to expedite the process and cut out the need for a lender, although this has its pros and cons.
Additionally, the application costs to refinancing can quickly stack up when deciding to refinance multiple times. This may lead you to pay more than intended and consequently fail to meet your financial goals.
If you are unhappy with your current loan, you can talk to your current lender about changing your loan term. Refinancing does not have to be the only solution to finding a more competitive interest rate or better monthly repayments.
The best time to refinance your home loan is when you're in a financially secure position and adequately prepared to change home loans. However, specific circumstances may incentivise you to start thinking about a home loan refinance.
Below, we explain in more detail why these circumstances are a suitable time to refinance your home loan and provide some financial benefits that may arise as a result.
If you have experienced a change in your financial circumstances, whether positive or negative, you may want to consider refinancing your home loan to help you save money.
For example, it is often a good time to refinance when interest rates are decreasing, as switching home loans could allow you to save on your repayments.
Alternatively, you want to change from a variable rate home loan to a fixed rate home loan if interest rates are rising. A fixed rate means that your payments will remain the same, rather than increasing alongside the interest rate, which occurs with a variable loan.
A significant change in your personal circumstances may cause the need for a quick cash injection or a reduction of loan repayments until you find financial security.
Refinancing can grant you access to funds for these circumstances, particularly cash-out refinance, which allows you to withdraw the equity stored in your home.
Notable change in circumstances can include:
However, not all circumstances come with negative financial impacts. For instance, if you have inherited a large sum of money, you may want to consider refinancing to allow for new repayment terms to pay off your loan faster.
If you have chosen a fixed-rate home loan and are not interested in allowing it to convert into the standard variable rate at its end, you can look elsewhere for a better loan.
People often choose to do this as variable rates are not consistent. It also sets a good timeline for when to reassess your current loan features and look for something that better suits your future circumstances.
When your fixed term ends, you can choose to remain with a fixed-rate loan if interest rates have remained low. Otherwise, if you want to pay off your loan amount sooner, you can refinance with a variable loan that allows for additional repayments.
Additionally, refinancing at the end of your fixed-rate loan means no early exit fees, making this a very appealing time.
Lenders will offer you significantly better rates if your loan amount is less than 80% of your property value if you choose to refinance your home loan.
Loan to Value Ratio (LVR) is the ratio of the loan amount compared to the value of the asset you’re buying, which is important to know when deciding to refinance. A higher loan amount than property value means paying more Lenders Mortgage Insurance (LMI), meaning that you could be facing extra costs on your home loan.
Thus, if your LVR is under 80% and your deposit over 20%, you will find it an opportune time to try refinancing your home loan since there will be no additional fees like LMI.
Just as there are times when refinancing your home loan is more beneficial, there are times when you should avoid refinancing unless it is necessary.
Such times can include:
If your equity is less than 20% in your home, many lenders will make you pay LMI. These costs will be particularly steep if your equity is under 10%, and can dilute the benefits of refinancing.
Even if you have been paying LMI on your existing loan, these payments do not carry over to your new loan. Thus, you must consider refinancing carefully if your equity is not at an adequate rate.
Applying for a loan requires a credit enquiry, which can make your credit rating fall. It may not be by much, but a formal credit enquiry requires understanding your current financial situation and history, meaning every little bit counts.
This is particularly important when you are attempting to refinance with multiple lenders. Multiple enquiries can imply desperation for a loan, indicating that you're not in a financially secure position to secure one.
If this is true and your credit score is poor, then you will only continue to lower it as you try to refinance your home loan.
Lastly, closing your previous loan means closing a credit facility. If you have held your loan for a long time and regularly met your repayment obligations, closing a positive record can influence your rating to drop.
Therefore, it is important to consider your current rating and the possible hits it can take before you decide to refinance.
Whether you have found a new loan with lower interest rates and better benefits, refinancing your home loan always comes with costs.
While not every lender will charge you all of the possible fees associated with closing and/or opening a new loan, you will still be charged some fees.
These costs can include the following:
These costs can range from minimal to significant depending on variables like your equity, credit score or financial circumstances. If you stay with the same lender as you refinance, however, many of these fees will not be applicable as you are not separating from the mortgage broker.
Refinancing makes sense if you are looking for a lower interest rate, flexible monthly repayments, or to get out of the fixed period of your home loan. This is especially true if your circumstances have changed and you need the flexibility and features of a new lender to suit them.
If you are considering refinancing your home loan, assess the health of your mortgage and ask yourself the following questions:
Regardless of your decision, you and your lender should review your home loan annually, or at least any time a better interest rate shows up, to see if that is the time to refinance.
If you are unsure about refinancing, there are alternatives to help you reach whatever goal you have in mind.
Your option of choice should be based on what your end goal is.
At the end of the day, it depends on what meets your financial circumstances alongside your wants and needs. We always recommend speaking to a financial advisor to get a professional and qualified opinion on how to manage your money and debts.
Joust connects you to a range of lenders and brokers that suits your home loan requirements through an online home loan marketplace. By putting your mortgage on the market, you can sit back and watch as banks and lenders alike compete to bid.
Refinancing your home loan has never been made easier as the power to choose lies in your hands. Joust is free to use and will not affect your credit rating, allowing you to peruse competing lenders until you find the interest rate or repayment period that works best for you.
Note: The information in this article is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.