How soon can you refinance a mortgage?
It’s possible to refinance your home loan any time after settlement. But when it makes sense to refinance depends on why you want to refinance and how much it will cost you.
Refinancing a home loan costs money, and these costs can quickly add up, potentially negating any savings you may realise from refinancing. Making too many loan applications in a short span can also negatively affect your credit score.
Because of this, many borrowers wait at least six to 12 months before refinancing.
What to consider when refinancing
One common reason to refinance is to get a better rate and save money. However, if you’re refinancing too often or too soon after you take out a mortgage, you may not be saving much (or any) money, at least not in the short term.
Before making the switch, it’s worth considering how much it’ll cost you to refinance. Refinancing costs can include application fees, establishment fees, and valuation fees required for your new mortgage, and discharge fees charged by your original lender. If you’re not sure if you’d win out by refinancing, crunching the numbers yourself or speaking to a mortgage broker can help you work out if it’s the right time.
How much can I save by refinancing my home loan?
The amount you save through refinancing depends on several factors, including:
- Your current interest rate
- The interest rate you could secure by refinancing
- The size of your loan
- Your remaining loan term
- Any fees involved in switching lenders
Let’s say you have a $500,000 home loan with a 6.5% p.a. interest rate and 25 years remaining. Your monthly repayments would be around $3,376. If you refinance to a 5.9% p.a. interest rate, your repayments could drop to approximately $3,191— saving you over $185 per month and more than $55,000 in interest over the life of the loan.
However, keep in mind that refinancing also involves fees and costs, which you should weigh against your potential savings.
What are the costs of refinancing?
Exit fees on variable rate home loans have been banned for well over a decade. But you could still face plenty of other costs if you choose to refinance. The main costs are outlined below:
Costs charged by the initial lender
- A discharge fee may be charged to cover the admin costs of winding up your current home loan.
- Break fees may apply if you refinance a fixed rate loan before the fixed rate term expires.
Costs charged by the new lender
- Application fees or a loan establishment fee may be charged by the new lender.
- A property valuation fee may be charged if your new lender requires a formal valuation of your property.
- A settlement or legal fee may be charged by the lender.
- A mortgage registration fee may be levied by your state or territory government to register your new home loan.
While the above fees are relatively common, it’s hard to put a concrete figure on how much refinancing will cost, as fees vary from lender-to-lender.
Will refinancing impact my credit score?
Yes, refinancing can impact your credit score. Each time you formally apply for a credit product, including a mortgage, it’s typically recorded on your credit report, which can cause your credit score to drop.
It’s generally best to shop around for the right loan for your needs before applying, and limit the number of loan applications you make to keep your credit score healthy. You can also check your credit score with Canstar’s free tool.
Do you have sufficient home equity to refinance?
One aspect of refinancing that can be easy to overlook is the need to have sufficient home equity to avoid paying lenders mortgage insurance (LMI).
LMI typically applies if your loan is worth more than 80% of your home’s value, meaning you have less than 20% equity in your home. In this case, the new lender may ask you to pay LMI, even if you’ve already paid an LMI premium when you took out your first home loan.
As LMI can run into thousands of dollars, it has the potential to wipe out any savings from refinancing.
Should I refinance?
Refinancing can be worthwhile, but the savings of moving to a new loan should outweigh the costs involved.
Your home loan should ideally not be a ‘set and forget’ financial product. While refinancing continuously may not be helpful, it’s worth reviewing your mortgage at least annually to see if your loan still has a competitive interest rate, plus the features and flexibility you need.
In today’s competitive home loan market, some lenders offer cashback deals and other incentives to refinancers. However, it is a good idea to be sure your new loan stacks up for long-term savings on interest rather than refinancing based solely on a short-term benefit.
