Five tips for refinancing your home loan

Refinancing a mortgage can be a great way to refresh your finances to better suit your current lifestyle. 

To help make sure your refinancing experience goes as smoothly and painlessly as possible, RateCity has put the following tips together for your consideration:

Estimate how much you can save – will you REALLY be better off?

Many borrowers refinance their home loans in order to improve their financial situations, whether by lowering their interest rates, gaining the benefits of useful financial features, or putting the equity in their mortgage to good use.

But if you do some research and make a few calculations first, you may find that a refinance may not be the most ideal option in your current financial situation.

If you’re looking to refinance to a mortgage with a lower interest rate, it’s possible that refinancing could end up costing more than you expect. Even if your interest payments would be relatively low, you could find yourself stung by ongoing fees and/or switching charges, especially if you’re currently on a fixed rate mortgage and would have to pay break costs to leave it.

If you’re thinking of switching home loans to benefit from financial features such as offset accounts or a redraw facilities, you should check if there are any terms, conditions or other restrictions around using these features with the lenders you’re considering. You could find yourself unable to enjoy the full benefits of these features, or you may have to pay extra for the privilege.

If making use of your equity is your refinancing objective, try and work out whether your project will leave you better off. If you want to upgrade to a bigger and better home or investment property, or rent out your current property and buy a new one, do a few calculations to confirm that your plan is affordable.  that you’ll be able to afford your new property. Even if on paper it looks like you’ll be approved for the refinance, that doesn’t mean your new situation will be easily affordable, especially if a surprise lifestyle change or an emergency leads to a sudden shift in your finances.

Look beyond the bottom line and compare what the different lenders are offering

It makes sense on paper to base your home loan switch on numbers. The better your interest rates, the less you’ll need to pay, and the better off you’ll be.

But depending on your situation, the lender that should look the best on paper may not be the most ideal choice for your financial situation, due to aspects of their product or service offering that aren’t taken into account by even the most thorough of online comparison calculators (yet!).

For example, some of the lenders offering some of the lowest interest rates and fees are online-only lenders, who operate entirely electronically, without any branches or shopfronts where you can visit. If you’re not entirely confident about making loan applications over the internet, or if you’d appreciate having the option available to walk into a branch and sit down with a manager to talk though your loan, these lenders may not be the most ideal options for you.

Also, if you finance with one of the big banks or a similar lender, you may also be able to take out full refinancing packages, where your mortgage comes with access to savings and transaction accounts, credit cards, or other helpful options. You may find that these lenders offer more value for your money than some of the other options.

Could consolidating debt help your finances?

Businesswomen Managing account familand expenditurey finances for income

If you’re struggling to manage your finances from month to month, you may be considering refinancing your home loan onto a lower interest rate, and hopefully reducing your monthly loan repayments.  But if you take a closer look at your budget, what if you find that it’s not so much your mortgage that’s causing your financial stress, but your other debts?

For example, if you owe money on a personal loan, a car loan, and a couple of credit cards, then you’ll have to make separate monthly repayments for each of these debts, as well as for your home loan. You’ll also have to pay interest separately for each of these debts, each one at a different (and often high) rate. If you combine the costs of all these debts, they can add up to a pretty penny.

In situations like this, it may be worth thinking about refinancing. Not necessarily to get a lower interest rate (though that wouldn’t hurt), but to consolidate your other debts into your mortgage. This not only simplifies your finances by swapping out your multiple repayments for just the one, but you’ll also only have to pay interest the once, at a rate that’s likely to be significantly lower than what you’d find on a credit cards or personal loan.

One important risk to watch out for when refinancing for debt consolidation is turning your short-term debts into long-term ones. While paying off a maxed-out credit card at a high rate of interest may be financially painful in the short term, adding this debt to your mortgage and paying it back at a lower rate over a 30-year term may ultimately result in you paying much more in total interest than if you’d kept the debts separate. Some lenders offer the option to split the balances in a consolidated mortgage, so you can pay off your property and your other debts separately, but at the same rate of interest. This can help to keep your finances under control without stretching out your repayments for too long.

Consider fixing your rate…

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While switching to a home loan with a lower interest rate than your previous one is all well and good, some of the benefits of refinancing your mortgage can be lost if the RBA starts raising the cash rate, bringing up most standard variable interest rates with it. If you’re unlucky, it’s possible that multiple rate rises could leave your refinanced mortgage right back where it started.

When refinancing, it may be worth finding out if your lender can fix your interest rate for a few years, so you can enjoy the benefits of these reduced repayments for a while, whether it’s to free up your money to use elsewhere, or even to pay extra onto your mortgage and get ahead on your repayment schedule.

Of course, this option may not be suitable for every borrower. Fixed rate mortgages can sometimes be less flexible than those with variable rates, so fixing your rate could mean missing out on some of the flexible financial features that you might find valuable.

…but beware of Honeymoon Rates!

Some lenders may try to attract your business by offering a very tempting heavily-discounted interest rate if you choose to refinance your mortgage with them. The rate may even be fixed for a period after your switch, so you can keep enjoying its benefits for longer.

However, in some cases, when the fixed period ends on these super-low introductory rates, they’ll shoot up significantly, often to the lender’s standard variable interest rate, leaving once-confident borrowers now struggling to reorganise their budgets.

These enticing low introductory rates are sometimes known as Honeymoon Rates, as they’re a great way to start your long-term commitment, but they don’t last forever.

To sidestep the worst effects of Honeymoon Rates, check your lender’s terms and conditions before signing on the dotted line, and plan your budget in advance to calculate whether you’d still be able to afford your home loan in the event of a sudden sharp rate rise.

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Learn more about home loans

What happens to my home loan when interest rates rise?

If you are on a variable rate home loan, every so often your rate will be subject to increases and decreases. Rate changes are determined by your lender, not the Reserve Bank of Australia, however often when the RBA changes the cash rate, a number of banks will follow suit, at least to some extent. You can use RateCity cash rate to check how the latest interest rate change affected your mortgage interest rate.

When your rate rises, you will be required to pay your bank more each month in mortgage repayments. Similarly, if your interest rate is cut, then your monthly repayments will decrease. Your lender will notify you of what your new repayments will be, although you can do the calculations yourself, and compare other home loan rates using our mortgage calculator.

There is no way of conclusively predicting when interest rates will go up or down on home loans so if you prefer a more stable approach consider opting for a fixed rate loan.

What is the best interest rate for a mortgage?

The fastest way to find out what the lowest interest rates on the market are is to use a comparison website.

While a low interest rate is highly preferable, it is not the only factor that will determine whether a particular loan is right for you.

Loans with low interest rates can often include hidden catches, such as high fees or a period of low rates which jumps up after the introductory period has ended.

To work out the best value for money, have a look at a loan’s comparison rate and read the fine print to get across all the fees and charges that you could be theoretically charged over the life of the loan.

What is the difference between fixed, variable and split rates?

Fixed rate

A fixed rate home loan is a loan where the interest rate is set for a certain amount of time, usually between one and 15 years. The advantage of a fixed rate is that you know exactly how much your repayments will be for the duration of the fixed term. There are some disadvantages to fixing that you need to be aware of. Some products won’t let you make extra repayments, or offer tools such as an offset account to help you reduce your interest, while others will charge a significant break fee if you decide to terminate the loan before the fixed period finishes.

Variable rate

A variable rate home loan is one where the interest rate can and will change over the course of your loan. The rate is determined by your lender, not the Reserve Bank of Australia, so while the cash rate might go down, your bank may decide not to follow suit, although they do broadly follow market conditions. One of the upsides of variable rates is that they are typically more flexible than their fixed rate counterparts which means that a lot of these products will let you make extra repayments and offer features such as offset accounts.

Split rates home loans

A split loan lets you fix a portion of your loan, and leave the remainder on a variable rate so you get a bet each way on fixed and variable rates. A split loan is a good option for someone who wants the peace of mind that regular repayments can provide but still wants to retain some of the additional features variable loans typically provide such as an offset account. Of course, with most things in life, split loans are still a trade-off. If the variable rate goes down, for example, the lower interest rates will only apply to the section that you didn’t fix.

What is a variable home loan?

A variable rate home loan is one where the interest rate can and will change over the course of your loan. The rate is determined by your lender, not the Reserve Bank of Australia, so while the cash rate might go down, your bank may decide not to follow suit, although they do broadly follow market conditions. One of the upsides of variable rates is that they are typically more flexible than their fixed rate counterparts which means that a lot of these products will let you make extra repayments and offer features such as offset accounts.

What is a comparison rate?

The comparison rate is a more inclusive way of comparing home loans that factors in not only on the interest rate but also the majority of upfront and ongoing charges that add to the total cost of a home loan.

The rate is calculated using an industry-wide formula based on a $150,000 loan over a 25-year period and includes things like revert rates after an introductory or fixed rate period, application fees and monthly account keeping fees.

In Australia, all lenders are required by law to publish the comparison rate alongside their advertised rate so people can compare products easily.

Interest Rate

Your current home loan interest rate. To accurately calculate how much you could save, an accurate interest figure is required. If you are not certain, check your bank statement or log into your mortgage account.

What is a standard variable rate (SVR)?

The standard variable rate (SVR) is the interest rate a lender applies to their standard home loan. It is a variable interest rate which is normally used as a benchmark from which they price their other variable rate home loan products.

A standard variable rate home loan typically includes most, if not all the features the lender has on offer, such as an offset account, but it often comes with a higher interest rate attached than their most ‘basic’ product on offer (usually referred to as their basic variable rate mortgage).

How can I calculate interest on my home loan?

You can calculate the total interest you will pay over the life of your loan by using a mortgage calculator. The calculator will estimate your repayments based on the amount you want to borrow, the interest rate, the length of your loan, whether you are an owner-occupier or an investor and whether you plan to pay ‘principal and interest’ or ‘interest-only’.

If you are buying a new home, the calculator will also help you work out how much you’ll need to pay in stamp duty and other related costs.

How do I calculate monthly mortgage repayments?

Work out your mortgage repayments using a home loan calculator that takes into account your deposit size, property value and interest rate. This is divided by the loan term you choose (for example, there are 360 months in a 30-year mortgage) to determine the monthly repayments over this time frame.

Over the course of your loan, your monthly repayment amount will be affected by changes to your interest rate, plus any circumstances where you opt to pay interest-only for a period of time, instead of principal and interest.

Remaining loan term

The length of time it will take to pay off your current home loan, based on the currently-entered mortgage balance, monthly repayment and interest rate.

What is a honeymoon rate and honeymoon period?

Also known as the ‘introductory rate’ or ‘bait rate’, a honeymoon rate is a special low interest rate applied to loans for an initial period to attract more borrowers. The honeymoon period when this lower rate applies usually varies from six months to one year. The rate can be fixed, capped or variable for the first 12 months of the loan. At the end of the term, the loan reverts to the standard variable rate.

What is an interest-only loan? How do I work out interest-only loan repayments?

An ‘interest-only’ loan is a loan where the borrower is only required to pay back the interest on the loan. Typically, banks will only let lenders do this for a fixed period of time – often five years – however some lenders will be happy to extend this.

Interest-only loans are popular with investors who aren’t keen on putting a lot of capital into their investment property. It is also a handy feature for people who need to reduce their mortgage repayments for a short period of time while they are travelling overseas, or taking time off to look after a new family member, for example.

While moving on to interest-only will make your monthly repayments cheaper, ultimately, you will end up paying your bank thousands of dollars extra in interest to make up for the time where you weren’t paying off the principal.

How do I know if I have to pay LMI?

Each lender has its own policies, but as a general rule you will have to pay lender’s mortgage insurance (LMI) if your loan-to-value ratio (LVR) exceeds 80 per cent. This applies whether you’re taking out a new home loan or you’re refinancing.

If you’re looking to buy a property, you can use this LMI calculator to work out how much you’re likely to be charged in LMI.

What happens when you default on your mortgage?

A mortgage default occurs when you are 90 days or more behind on your mortgage repayments. Late repayments will often incur a late fee on top of the amount owed which will continue to gather interest along with the remaining principal amount.

If you do default on a mortgage repayment you should try and catch up in next month’s payment. If this isn’t possible, and missing payments is going to become a regular issue, you need to contact your lender as soon as possible to organise an alternative payment schedule and discuss further options.

You may also want to talk to a financial counsellor.