Unlike the ‘olden days’ when it seemed borrowers were stuck with one lender for their entire loan term, it is now very common for people to refinance their mortgage with a different bank or lender, or to just pick a different loan with their current lender.
Even so, past surveys of homeowners have found as many as half of all mortgage borrowers are not even aware of what their current rate of interest is, let alone whether it is competitive compared to what else is available on the market. It's a surprising figure given a mortgage is likely to be the biggest expense most people will carry in their lifetimes.
But before you consider whether you should refinance your home loan, it pays to understand the basics.
What is refinancing?
Refinancing is a term used to describe the changeover of a mortgage to a different institution or account. It is often done when there are appealing benefits such as lower interest rates, more flexible loan terms and features, less fees, special offers, or debt consolidation requirements.
There are two main types of refinancing:
- When you move your loan to another financial lender, it is called an external refinance.
- When you refinance your home loan with your existing lender, it’s known as an internal refinance.
Refinancing is now very common in Australia. In May 2020, record-low interest rates saw refinancing to different lenders grow to its highest ever level after a 63% increase year-on-year. In January 2021 more than $15.6 billion worth of loans were refinanced, and the near 500,000 refinanced mortgages in 2020 represented about 8% of all home loans.
See also: How to refinance your home loan.
With so many people refinancing, there must be great savings on offer, right?
How much can refinancing save me?
In some cases, refinancing can save you quite a lot, both in the short term but especially long term. In a report on bank lending in 2020, the Australian Competition and Consumer Commission (ACCC) found borrowers with home loans between three and five years old paid an average of 58 basis points (0.58%) more than people with new loans. It calculated switching to a new loan could save the average customer $1,400 in the first year and $17,000 over the life of a loan.
When comparing two similar loans, a 100-basis point reduction in the interest rate (such as 6.50% p.a. to 5.50% p.a.) could save tens of thousands of dollars over the life of your loan (potentially more than $100,000). To work out what your monthly repayments might be and how much you could save by refinancing, you can use our home loan repayment calculator.
Competitive refinance home loans
If you're thinking of refinancing your home loan, it pays to do your research to ensure any new loan you switch to offers a good rate and the features that best meet your needs. The table below features some of the lowest interest rates on the market for owner occupiers.
| Lender | Home Loan | Interest Rate | Comparison Rate* | Monthly Repayment | Repayment type | Rate Type | Offset | Redraw | Ongoing Fees | Upfront Fees | Max LVR | Lump Sum Repayment | Additional Repayments | Split Loan Option | Tags | Features | Link | Compare | Promoted Product | Disclosure |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
6.04% p.a. | 6.08% p.a. | $3,011 | Principal & Interest | Variable | $0 | $530 | 90% | 4.6 Star Customer Ratings |
| Promoted | Disclosure | |||||||||
5.99% p.a. | 5.90% p.a. | $2,995 | Principal & Interest | Variable | $0 | $0 | 80% | Apply in minutes |
| Promoted | Disclosure | |||||||||
6.09% p.a. | 6.11% p.a. | $3,027 | Principal & Interest | Variable | $0 | $250 | 60% |
| Promoted | Disclosure |
Pros and cons of home loan refinancing
Like any financial product, refinancing does not suit every borrower. Here's a list of some of the pros and cons involved in refinancing a home loan.
Pros:
- Switch to a lower interest rate: One of the primary reasons people refinance is because they want a lower interest rate. Having a lower rate can not only reduce your monthly repayments but can potentially help you pay your loan off sooner as well.
- Equity Access: When you refinance your home loan, you will have access to any equity you have paid over the course of your mortgage. If you choose, this could be used for things like re-investing, renovations, taking a holiday, purchasing a new car, and more. However, before you go spending too much of your equity, it’s important to remember that the more equity you have, the better chance you have of getting the very best interest rate you can from your new lender.
- Flexibility: When you refinance your home loan, you can lengthen or shorten the loan term (i.e. how many years it takes to pay off the loan) to suit your needs. By increasing your loan term, you can reduce your regular payments over a longer period of time. By decreasing your loan term, you may increase your payments but pay less interest overall.
Cons:
- Fees: It’s important to do your research before you consider refinancing as there can be a number of fees involved. These may include exit fees, valuation fees, application fees, and break fees. It could cost hundreds or even thousands of dollars to switch if you're not careful.
- Lenders Mortgage Insurance: If your equity is less than 20% of the property value, your lender may require you to take out Lenders Mortgage Insurance (LMI) when you switch. This protects the lender if you default on your home loan but could end up putting you seriously out of pocket.
- Your credit score: Most people don’t realise that every application for credit goes into their personal credit file. Refinancing your home loan often could impact your credit score which could make it difficult to receive lower interest rates for future applications.
Savings.com.au's two cents
If you’re thinking about refinancing but have only just taken out a mortgage, it is still possible for you to do so. In fact, some people look to refinance their home loans within months of buying their property. This makes sense if you think about it. Buying a home for most people really focuses on just that – the home or property. Very rarely does it involve spending more time on finding the right home loan, but the loan is just as important.
Ultimately, refinancing is not going to suit every person in every situation. It's wise to consider your individual circumstances and weigh up all of the pros and cons before making a move to switch loans. For help making your decision, it's worth running your figures through Savings.com.au's Mortgage Switching Calculator and Refinancing Costs Calculator.
First published on April 2021
Image via Unsplash
Ready, Set, Buy!
Learn everything you need to know about buying property – from choosing the right property and home loan, to the purchasing process, tips to save money and more!
With bonus Q&A sheet and Crossword!
Harry O'Sullivan
Denise Raward
Brooke Cooper
