With the cash rate on hold, many borrowers are taking a closer look at their home loans.
If you haven’t reviewed yours in a while, it may be worth exploring whether your current loan still suits your situation. With cost-of-living expenses still stretching household budgets, even a small reduction in your interest rate could make a meaningful difference to your monthly repayments.
Refinancing isn’t right for everyone, but it’s always worth understanding your options. Here’s what to consider before you decide.
Switching could make a meaningful difference
Interest rates can vary significantly between lenders. According to MoneySmart.gov.au, there can be a difference of more than 2% between variable home loan rates on the market. Depending on your loan size, this could translate to a meaningful difference in what you’re paying overtime.
If you’ve been with the same lender for some time, you may also be stuck paying ‘loyalty tax’. Lenders often reserve discounts and deals for new customers rather than existing ones, making it even more important to regularly review your home loan and compare others.
Factor in all fees and charges
Before refinancing, it’s important to understand the fees and charges that may apply. These can include:
- Break fees – if you’re on a fixed-rate loan
- Discharge fees – charged by your current lender to close your loan
- Application fees – charged by the new lender to set up your loan
- Switching fees – if you stay with the same lender but change loan products
- Stamp duty – depending on your state or territory
Weighing up these costs against any potential change in your repayments is an important part of deciding whether refinancing makes sense for your circumstances.
Be aware of Lenders’ Mortgage Insurance
Before refinancing, it’s worth having a clear picture of your home’s current market value and how much equity you hold, particularly given that property values have fluctuated across many markets in recent years.
If you hold less than 20% equity in your property, refinancing may trigger a requirement to pay Lenders Mortgage Insurance (LMI). It’s also worth noting that LMI is generally not transferable between lenders, meaning even if you paid it on your original loan, you may need to pay it again on a new one.
This is an important cost to factor in when reviewing whether refinancing is the right move for you.
Consider the loan term
When refinancing, it’s important to pay attention to the loan term. Resetting to a longer term, such as 30 years, generally means paying more interest over the life of the loan, even if the rate is lower.
Depending on your circumstances, it may be worth considering a loan term that aligns closely with what remains on your current loan.
Be intentional with interest-savings features
When rates are rising, having a financial buffer can help ease pressure on your budget. Features like an offset account or redraw facility allow you to keep extra funds working against your loan balance, which may help reduce the interest you’re charged while still giving you access to those funds if needed.
It’s worth exploring whether your current or prospective loan includes these features as part of your review.
Get a professional on your team
Comparison websites can be a useful starting point, but they may not show the full picture. Some feature sponsored listings or a limited selection of lenders and products.
A mortgage broker can offer a more personalised approach, taking the time to understand your individual circumstances before comparing options across a wide range of lenders.
When reviewing your options, there are a few additional things to be aware of:
- Switching costs vs. rate risk – it’s worth understanding any upfront costs involved alongside the potential impact of further rate movements
- Serviceability – lenders will assess whether you can meet repayments under their lending criteria, which is an important part of any refinancing application
- Rate lock – if you’re considering a fixed-rate loan, a rate lock option may allow you to secure a quoted rate while your application is being processed
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