When should I refinance my home loan?

It seems like every household bill is going up, as inflation hits everything from how long you can spend in the shower to the cost of groceries in your trolley. The cost of housing – often the largest expense for many people – is not immune to this upward march.

In an attempt to help steer the economy through the effects of COVID, the Reserve Bank of Australia (RBA) set the cash rate at a historically low level in October of 2020, with many Aussies taking advantage of the resulting interest rate cut and taking out mortgages in the year that followed.

In 2022, in an attempt to fight inflation, the central bank began raising the cash rate again, in an 18-month series of hikes that saw rates rise, and variable rate home loan repayments become significantly more expensive for many.

Some are predicting that rates may fall again by the end of 2024, but if your variable rate repayments have become pricier than you’d like, or if your cheap fixed rate is about to come to an end, you may be considering your options.

Who can refinance?

If you’ve owned your property for some time and have enough equity, made repayments on time, a good credit score and a steady income, there is a good chance that you may be able to refinance. Each lender has its own eligibility requirements that you will have to meet before you will be approved, similar to the ones you passed when you took on your existing loan. And, your existing loan may have conditions, such as fees, which could add to the cost of refinancing.

However, it’s important to note that not every borrower will necessarily be able to refinance. Typically lenders will only allow borrowers with at least 20% equity to refinance – meaning that your loan is no more than 80% of what the home is valued at by the bank at the time you want to refinance.

If your existing loan is fairly new and you paid a deposit of less than 20%, or if your property’s value has dropped, you may not meet this threshold. Refinancers also need to meet other loan eligibility requirements, such as having a good credit score, a healthy record of repayments, and income requirements (also known as loan serviceability requirements).

Why would you refinance your home loan?

There are a number of reasons you might choose to refinance your loan, but some major ones include:

• To get a more favourable interest rate with a new lender, or to get access to features you want like an offset account or redraw facility.
• To access equity in your home, in order to fund an investment property or new home purchase.
• To switch onto another suitable home loan product if your fixed rate is about to end.
• To consolidate various debts into one and make them more manageable to pay off.

Can you save by refinancing?

With cost of living pressures biting, refinancing could be a way to save, especially if you haven’t re-evaluated your home loan in a while.

“The Reserve Bank reports existing owner occupied borrowers are repaying their loan at an average variable rate of 6.39 percent. This rate is still way above the lowest rates in the market,” says Canstar finance expert Steve Mickenbecker.

“Refinancing to the lender offering the lowest ongoing variable rate available on Canstar.com.au today, which stands at 5.75 percent, could reduce monthly repayments on a $600,000 loan over 30 years to $3,501, resulting in potential savings of $248 per month or over $2,976 per year.”

“This could be the equivalent of saving your annual electricity and gas bill or the cost of insuring the family’s two cars. For the sake of a few hours of work, it’s a saving that could make a difference to a household’s bottom line.”

According to the latest Australian Bureau of Statistics (ABS) lending indicators, a total of $19.54 billion in loans were switched to a new lender during April of 2024 – below the peak of $21.5 billion in July of 2023, but still a sign that many Aussies are refinancing to get a better deal.

When is the best time to refinance?

Mr Mickenbecker said there were a range of “trigger points” where it would be logical to take a closer look at the option of refinancing, including:

1. Change of official cash rate

This is a sign that your lender’s rate could go up or down, in line with the official cash rate. Typically, if the cash rate goes up, lenders will lift the interest rates they charge to their customers. For borrowers on variable loans, this means repayments are adjusted upwards, too. When rates go up, you might expect refinancing to become more popular.

“There’s nothing like getting a notice from your bank saying your repayments are increasing by $50 or $100 to remind you that there might be a better answer elsewhere. And if you can refinance, even if it’s for a 1% lower rate, that reduction in your loan cost is basically insulating you from the next couple of interest rate increases. You’re effectively immune to those hikes and that is a pretty good feeling.”

2. End of introductory rate or honeymoon rate period

Some lenders offer ‘honeymoon rates’ or introductory rates. With these types of loans, you will pay a discounted rate for a set period of time before your rate reverts to a more typical advertised rate (often, but not always, the lender’s standard variable rate). If you are nearing the end of this term, it could pay to check what that ‘revert rate’ is. This is the rate that you will be charged after the ‘honeymoon’ of the lower rate ends, and it can be significantly higher than the interest rate at which the loan started.

“Frequently, borrowers will find that the revert rate is at the higher end of interest rates offered by that lender,” Mr Mickenbecker said.

“If you talk to your lender you may be able to negotiate a better deal, but failing that you may have to look to refinance externally.”

Learn more: What is a revert rate?

3. End of a fixed term

This is when the initial period you signed up for on a fixed interest rate loan comes to an end. At this point, you would typically have to decide whether or not to enter another fixed rate term at a different interest rate, or revert to the loan type and revert rate that is stipulated in your loan contract. You could also decide to split the loan, and have part of it in a fixed rate arrangement and the rest in a variable rate loan. Or, you may consider refinancing altogether, with a different lender.

Learn more: What should I do when my fixed-rate loan term is ending?

There are also times when personal circumstances might prompt you to consider refinancing. These may include:

4. Your economic situation changes

If your personal economic situation were to improve, such as obtaining a higher-paying job or moving from a single-income to dual-income family, you may consider refinancing. It could be possible to obtain a better deal in the form of a lower interest rate or better loan package, as you may be considered less of a lending risk and more attractive as a new customer to other lenders. Some banks even offer special loan deals to people who do certain jobs, such as doctors.

On the other hand, if you were to face financial hardship, you may find that refinancing your loan to a longer term (in exchange for paying more for your loan in the long run) and a lower interest rate may help to contain living costs in the short term. However, it’s important to know exactly how changing your loan would impact your finances, and it could be a good idea to obtain suitably qualified financial advice about the possible benefits and risks of applying to refinance.

5. To access equity in your home

If you’ve paid a reasonable amount of your loan off, or the value of your home has increased, you may decide to refinance to take advantage of the increased equity you have built up in your home. To do this, you would need to borrow a larger amount than the balance of your existing loan. If you are eligible, lenders will typically lend you up to 80% of the current market value of your home. The extra money borrowed could be used to, for example, buy an investment property or shares, to diversify your financial holdings, or to do some renovations on your home. However, it’s important to keep in mind that assuming your interest rate and fees remain the same, your home loan repayments would increase, as would the total cost of paying off the loan compared to keeping your existing loan. And watch out for situations where you could enter into ‘negative equity’, where your loan is worth more than what you could sell it for.

6. You need more flexibility – or greater certainty – in your loan

Home loans often last for a long time, and may not keep up with changes in your lifestyle which could mean that you need different features. Such features might include the option of an 100% offset account, which could help cut interest costs, or a redraw facility which would allow you to access any extra repayments you make into your loan. Conversely, you might like to be able to make extra repayments over your existing loan’s yearly limit. Perhaps you want to change from a variable rate to a fixed rate loan so you know your exact repayments for a period of time, such as during a period of extended parental leave.

If you are considering refinancing, you can compare refinance options with Canstar.

Before signing up to any new deal, it’s important to read all important documentation, such as the Target Market Determination, Key Facts Sheet and any terms and conditions, and to understand the costs involved and what impact it will have on your financial position in the long term.

Original article by Amanda Horswill. Cover image source: mavo/Shutterstock.com