When is the right time to refinance your mortgage?
When buying a property it’s important to shop around and find the best home loan option for your circumstances. This can be time consuming - or - you can find a good broker to do it for you :) Anyway, once the loan is settled and the house is yours you’ll be keen to get on with your life and enjoy your new property, and rightly so. However, it’s important to keep one eye on that mortgage and ensure that it’s being reviewed regularly enough, lest you find yourself with a less than optimal loan set up for your current lifestyle.
Here are some things that I discuss with my clients when we look at refinancing.
When is the best time to consider refinancing?
This isn’t a one size fits all answer so here are some things to consider:
Have interest rates changed? At the time of writing much of Australia is keenly following the RBA’s decisions around the official cash rate. After a small 0.25bps drop at the last meeting and inflation numbers within the RBA’s target it’ll be interesting to see whether rates fall again at the next meeting. Either way, they did move last time and not all banks responded equally. Unless you are on a fixed rate loan it’s a good idea to do a quick check every time the RBA moves rates. Now, if your bank hasn’t passed on the rate cut in full you don’t necessarily need to refinance, but you should definitely give them a call and try to negotiate your rate.
Have your circumstances changed? When we set up a loan we make the best decision we can at that time but sometimes things change. Maybe you are earning a higher salary and can afford to update the kitchen (yay!). Or, perhaps you’ve decided to start a family and need a bit more flexibility with your repayments. The loan product that you start with is not necessarily going to suit you for the 20-30 years that your mortgage will last for and it’s reasonable to change it as your needs change.
Equity release for investing. This can be a really effective way to leverage equity in your family home to build wealth. As your broker I can assist with loan set up and discuss structure, however I recommend also seeking advice from a qualified Accountant or Financial Planner.
You haven’t checked it for a while. Typically it’s not worth refinancing within the first two years of a home loan, however, after that I recommend an annual review. Most of us would’ve heard of the ‘loyalty tax’ that we pay when we renew our insurance without getting other quotes. Home loans are exactly the same with many banks incentivising new customers whilst doing very little for existing ones.
What to consider before refinancing?
So you’ve done your checks or spoken to your broker and can see that there are better loan options available for you. What else do you need to consider before moving ahead?
Costs. Depending on the lender there may be application and valuation fees, however your broker will be able to provide this information before you make your decision. As a bare minimum you will need to pay registration fees to discharge the old mortgage and register the new one, approx $360 in NSW, and it usually costs a few hundred dollars for the banks legal team to prepare the documents.
Features. What do you actually need? This is important because whilst rates and cost of the loan are big considerations, how you like to manage your money and interact with you bank is also relevant. For example, a digital bank with a fantastic rate may not be right for you if you require branch access. Or, perhaps you like lots of offset accounts - some banks offer up to 10 whilst others offer 1. Your broker can help you find a loan that ticks all of your financial boxes.
Ultimately everybody’s requirements are different and it’s worth investing a small amount of time to check that yours are being met. And if they aren’t or if you would like a hand checking, please reach out. It could save you money!