When to Refinance Your Home Loan: A Comprehensive Guide

Is Refinancing Right for You?

Refinancing your home loan can potentially save you thousands of dollars over the life of your loan when done strategically. While many homeowners wait for Reserve Bank of Australia (RBA) rate movements before considering a switch, the reality is that with over 100 lenders operating across Australia, better rates may already be available regardless of the current rate environment.

However, a lower interest rate doesn't automatically guarantee a better overall deal. Making an informed decision requires understanding both the potential benefits and drawbacks of refinancing.

The Ideal Time to Refinance

The best time to refinance isn't tied to whether interest rates are rising or falling - it's when your current rate is significantly higher than competitive offers in the market. What truly matters is the difference between what you're currently paying and what's available elsewhere.

Before making any decisions, it's crucial to analyze the numbers carefully to ensure the benefits outweigh the costs.

When Refinancing May Not Be Advisable

Refinancing might not be beneficial if you have a Loan-to-Value Ratio (LVR) of 80% or higher. With equity less than 20% of your property's value, you'll likely need to pay Lenders Mortgage Insurance (LMI) again, even if you already paid it for your original loan. This additional expense can significantly reduce or eliminate any potential savings.

Understanding Refinancing Costs

When evaluating whether refinancing makes financial sense, you need to account for all associated expenses:

• Government fees: Non-negotiable charges required for property transfers

• Exit fees: Charges from your current lender for closing your loan

• Application fees: Potential charges from your new lender

• Break fees: Substantial penalties may apply if you're breaking a fixed-rate term

As a general rule, if refinancing costs $800-$900 but only saves you $400-$500 in interest over the next 12 months, it's likely not worth pursuing.

Potential Drawbacks to Consider

Frequent Refinancing

Refinancing too often can negatively impact your credit report. Multiple home loans within a short period (such as 3-4 different lenders within two years) may raise red flags for future lenders. This can result in fewer options and potentially higher interest rates when you next attempt to refinance.

Loan Term Extension

Be cautious about extending your loan term when refinancing. If you're five years into your mortgage and refinance to a new 30-year term, you could end up paying tens or even hundreds of thousands of dollars more in interest over the life of the loan, despite a lower rate.

How to Approach Refinancing

Negotiate With Your Current Lender First

Before switching lenders, approach your current bank about offering you a better rate. Many lenders have retention programs that "reprice" existing loans to retain valuable customers. This approach allows you to benefit from a reduced rate without incurring the costs and administrative burden of changing lenders.

Consider Your LVR Position

Banks typically structure their rates according to LVR tiers. If you've paid down your loan significantly or your property has increased in value, you might qualify for a better rate tier with your current lender. Simply getting your home revalued could potentially save you 10-15 basis points without the hassle of refinancing.

Compare Equivalent Products

When shopping for a new loan, ensure you're comparing "like for like" options with similar features to your current product. The lowest advertised rate isn't always attached to the product that best meets your needs.

Current Rate Guidance

As an owner-occupier with a solid repayment history, you should aim for an interest rate under 5.75% in the current market.

Documentation Requirements

To refinance, you'll typically need to provide:

• Identification documents

• At least three months of pay slips

• List of regular expenses

• Credit card statements (if applicable)

• Current certificate of home insurance

• Other lender-specific documentation

This information has been prepared by PHA Financial Services and does not take into account your objectives, financial situation or needs. Before acting on this information you should consider whether it is appropriate to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. The information provided was accurate at the time of publication and changes in circumstances after a document is published may impact on the accuracy of information. Some information may have been collated from various third parties and we make no assertion that the information was originally ours.