Is refinancing a good idea?

If you’re concerned about the cost of your mortgage, then you might want to consider refinancing your home loan. It could be a good way to lower your interest rate —and your stress levels too.

*iSelect is the trading name of iSelect Mortgages Pty Ltd (ABN 86 148 217 181). iSelect Mortgages Pty Ltd is a credit representative (Credit Representative 400540) of Auscred Services Pty Ltd (Australian Credit Licence 442372). iSelect provides a referral to Lendi Pty Ltd ACN 611 161 856 (Lendi) who provides credit assistance. Lendi is a credit representative of Auscred Services Pty Ltd (ACN 164 638 171) (Licensee). iSelect Mortgages Pty Ltd receives a commission from the Licensee for each new customer account created and for each home loan submitted through this service.

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But it’s not a decision you should make in haste as whether it’s a good idea all depends on your own needs and situation.

What is refinancing?

Simply put, refinancing is when you replace an existing home loan with a new one.

People sometimes do this with their existing loan provider, as they may be able to negotiate lower interest rates or add certain features to the loan.

However, it is often done by switching home loan providers, too.

In such cases, the new provider will pay off the old home loan, and from that point on, you’d pay off the loan amount with this new provider.

Why refinance?

People refinance their loans for a variety of reasons, some of which include:

  • Lower interest rates
    Arguably the most common reason is to get a lower rate. You might find a new lender who offers a much more competitive interest rate. So if you refinance with them, you’ll potentially pay less interest on your regular repayments, and this could help you pay down your home loan faster, as long as the loan term is not extended.
  • Change rate type
    You might seek a different type of interest rate to suit your circumstances. For instance, the interest on a fixed rate home loan will stay the same over the fixed term period of your loan. But a variable rate home loan can allow you to make unlimited extra repayments, which could help you pay it off faster and save on interest.
  • Shorten loan term
    If you’re at a point in your life where you’re bringing in more money, you could also consider a home loan with a shorter loan term. Though this could mean higher repayments, you may be able to pay off the loan faster. Which in turn could mean that you pay less in interest overall.
  • Consolidate debt
    Your lender might also let you bundle your existing debts into a new home loan. The amount you owe on your credit cards, personal loans and other debts could be added to the home loan. And since the interest rate on home loans is generally on the lower side, this could also reduce the interest amount you pay on these debts.
  • Access savings or equity
    You might be able to do this by adding certain features to your loan. For instance, a redraw facility will let you access any extra repayments you’ve made. Similarly, a linked offset account can be used to deposit funds. You can then withdraw these funds at your leisure or leave them there to “offset” the principal so you are charged less interest on your loan.

Does timing matter?

You might already want to refinance your home loan, and so long as you can find a new loan with a more competitive rate, it could be worth considering.

However, you may also want to keep an eye on the interest rates offered by lenders. For example, if interest rates are low, you might wish to switch your rate from fixed to variable. That way, you’d be able to take advantage of the drop in rates. Just be aware that you may have to pay break fees to your existing lender.

Or, if you notice a rise in interest rates, you might consider a fixed home loan instead. This would then lock in the current rate for a fixed period and protect you from any further rises.

Additionally, if you’re in the middle of a fixed rate period, refinancing before this period ends could result in break costs being charged.

What about the costs?

Refinancing your home loan can come with its own costs, however. And it’s always wise to compare the cost of switching loans against the cost of staying with your current lender. To help with that, you should keep in mind these common fees and charges:

Break fees

●        This typically applies to fixed rate home loans.

●        Some lenders may charge these fees if you refinance or pay off a home loan before the term of the fixed rate , or make additional repayments.

●        Charged by the lender to cover any potential losses as a result of you leaving your contract early.

●        May be calculated based on interest rates, the balance of your loan and the remaining loan term.

Sign-up/application fees

●        When you refinance, you’re also applying for a new home loan. As part of this process, there may be a one-off application fee.

●        This fee can vary depending on your lender and the amount of money you borrow.

Discharge fees (a.k.a: legal, settlement, loan exit, or termination fee)

●        A common fee, charged when you pay off your home loan or refinance.

●        Differs from break fees, as they’re charged regardless of when you pay off the loan.

Valuation fees

●        As part of the refinancing process, the new lender will likely wish to have the value of your property assessed.

●        You may be charged a fee to cover the costs of this.

Land registration fees

●        Can be charged to certify a change of ownership on your mortgage title.

Lender’s Mortgage Insurance

●        You may need to pay this if your loan to value ratio is less than 20% of the property’s .

●        This is usually a one-off fee.

●        Read more about Lender’s Mortgage Insurance in our article here.

Ongoing/administrative fees (a.k.a.: loan service fees)

●        Some lenders will charge this fee over the term of your loan.

●        Covers the costs of processing payments and administration on your home loan.

●        Usually charged on an ongoing basis (e.g. every month).

Again, it’s important to weigh these fees against the long-term savings you could make by refinancing as any immediate costs could be offset by a lower interest rate or shorter term.

What else should I consider?

Before you refinance, you’ll want to ask yourself a number of questions too. These questions can then help you decide whether or not refinancing would be a good choice for you. You might include considerations like:

  • Can I afford the new repayments?
    This is a big one. A new home loan can come with new repayment amounts, which could be higher than the ones on your existing loan depending on the term, and any extra borrowing. Before signing off on anything, it’s a good idea to make sure your budget can realistically cover these repayments.
  • How long should the new term be?
    As noted by Moneysmart, you should also beware of switching to a loan with a longer term. This is because you’ll likely end up paying more in fees and interest if you do. This can happen even if the interest rate on the new loan is lower.
  • Am I likely to move in the future?
    If you see yourself moving in the next few years, keep in mind any potential future costs. Remember that break fees can apply if you plan to sell your property and close your fixed rate loan before the term date.

As long as you’re clear on how refinancing fits your circumstances, it could be a great way to save on your home loan and get more of the features you want.

But another crucial part is comparing the lenders for your new home loan. That way, you have a better chance of finding the loan that suits your needs.

And, fortunately, we can help there.

Where can I compare options?

At iSelect we’ve partnered with Lendi to make it easier to find a great deal on your home loan*. Click here to get started comparing from a range of lenders online, or give Lendi a call on 1300 186 260.

Last Updated: 07/07/2022