How often should you refinance?

How often should you refinance?

There is no hard and fast rule as to how often you should refinance your home loan but a typical Australian borrower is likely to change their loan every 4-5 years.

Refinancing will most likely involve some costs and it may take several months to recoup these minor loses. Most borrows will start seeing benefits from their switch in a matter of months but these costs should be taken into account when considering how often you should refinance. 

While there is no set period in which you should consider refinancing your loan, there are certain events that could trigger a desire to shop around. These events may be external changes or changes to your own personal circumstances that make refinancing an attractive option.

Here are some events that should prompt a check of your home loan and possibly lead to the decision to refinance.

External factors:

Business graph with arrows tending downwards

 

RBA cash rate change

The Reserve Bank of Australia announces on the first Tuesday of every month whether the cash rate will be increased, decreased or left on hold. The cash rate is the guiding figure by which lenders determine their own variable interest rates although there is no rule that expressly links the two. This means that even though the RBA may announce a cut to the cash rate, your lender can decide not to pass this cut on to customers.

By keeping track of the cash rate, and how your lender responds to changes to the cash rate, you can determine if it may be a good time to refinance your loan. This may mean refinancing to a lender who has cut rates, if the cash rate drops, or to a lender who has withheld an increase, if the RBA increase rates instead. This is not to suggest that refinancing every month based on the cash rate is advisable but rather that following how the cash rate is tracking, and how your lender is responding, could assist you in selecting a good time to refinance.

 

Bank hiking rates

Although not so much a concern for fixed rate borrowers, variable rate home loans can be subject to out-of-cycle rate increases at your lenders discretion. These are rate increases that are not directly related to the cash rate set by the RBA. These rate hikes are not likely to be publicised by your lender and you will probably only notice if you closely check your statements from the bank each month.

If you monitor your rate and notice it is creeping higher and higher then it may be time to consider refinancing to another lender. Of course, where possible, it can be useful to negotiate with your lender first to see if they will offer you a discount on the rate you are being charged.

Personal changes:

Young parents with one year old baby, having fun at home. They are laying on bad and playing with their baby in the morning.

 

No longer using the features for which you are paying

If you signed up for a home loan that includes many different features, chances are that you are paying for the privilege with either an above average interest rate or in fees. This is not necessarily an issue if you regularly use the features and derive some benefit from having them attached to your loan. If, however, you find that you aren’t making use of a vast majority of features it may be worth refinancing to a more basic loan offering low rates and fees.

Needing to access a feature not available with your current loan

On the other hand, you may have signed up for a basic loan that offers very little in the way of extras and now find that you want to access a certain feature. There are many different circumstances in which this may occur. For example, maybe you have had a significant pay increase and now you wish to be able to make unlimited extra repayments to your loan. Or perhaps you are planning on taking some time off work to raise a child and you would benefit from taking a repayment holiday. Whatever the case, as you come to learn more about home loans and the features they offer, you may find you are keen to refinance to gain access to a certain perk.

EXAMPLE – Five years on

Ella took out a home loan five years ago when she bought her first home and decided to go for a cheap fixed rate mortgage to keep costs down. The loan has been great in keeping monthly repayments low but it doesn’t offer much in the way of features. In the last five years Ella has progressed well in her chosen career and is now making substantially more than she did before. Ella wants to be able to make unlimited extra repayments on her loan so that she can keep interest costs down. At the same time, however, she wants the option of being able to access this equity via a redraw facility in future as she is considering renovating her bathroom at some stage in the next five years. As her current home loan does not offer these features she begins the comparison process to find the right loan to which she should refinance.

Fixed loan period is ending

For many borrowers, deciding when to refinance can be as simple as coming to the end of their fixed rate period. Generally, it is not advisable to switch home loans during a fixed rate period, as you will incur a break cost from your current lender, but when the fixed period is up it could be time to shop around.

After a fixed period your loan will generally revert to the variable rate offered by your lender. There is no guarantee that this rate will be the most competitive so take this opportunity to see what else is on the market. It is also a great opportunity to consider what other features, if any, you would like in a home loan and to find a loan that offers the extras you need.

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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 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 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 fixed home loan?

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.

What is the difference between a fixed rate and variable rate?

A variable rate can fluctuate over the life of a loan as determined by your lender. While the rate is broadly reflective of market conditions, including the Reserve Bank’s cash rate, it is by no means the sole determining factor in your bank’s decision-making process.

A fixed rate is one which is set for a period of time, regardless of market fluctuations. Fixed rates can be as short as one year or as long as 15 years however after this time it will revert to a variable rate, unless you negotiate with your bank to enter into another fixed term agreement

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 however fixed rates do offer customers a level of security by knowing exactly how much they need to set aside each month.

Who has the best home loan?

Determining who has the ‘best’ home loan really does depend on your own personal circumstances and requirements. It may be tempting to judge a loan merely on the interest rate but there can be added value in the extras on offer, such as offset and redraw facilities, that aren’t available with all low rate loans.

To determine which loan is the best for you, think about whether you would prefer the consistency of a fixed loan or the flexibility and potential benefits of a variable loan. Then determine which features will be necessary throughout the life of your loan. Thirdly, consider how much you are willing to pay in fees for the loan you want. Once you find the perfect combination of these three elements you are on your way to determining the best loan for you. 

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.

How do I refinance my home loan?

Refinancing your home loan can involve a bit of paperwork but if you are moving on to a lower rate, it can save you thousands of dollars in the long-run. The first step is finding another loan on the market that you think will save you money over time or offer features that your current loan does not have. Once you have selected a couple of loans you are interested in, compare them with your current loan to see if you will save money in the long term on interest rates and fees. Remember to factor in any break fees and set up fees when assessing the cost of switching.

Once you have decided on a new loan it is simply a matter of contacting your existing and future lender to get the new loan set up. Beware that some lenders will revert your loan back to a 25 or 30 year term when you refinance which may mean initial lower repayments but may cost you more in the long run.

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).

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's wrong with traditional ratings systems?

They’re impersonal 

Most comparison sites give you information about rates, fees and features, but expect you’ll pay more with a low advertised rate and $400 ongoing fee or a slightly higher rate and no ongoing fee. The answer is different for each borrower and depends on a number of variables, in particular how big your loan is. Comparisons are either done based on just today or projected over a full 25 or 30 year loan. That’s not how people borrow these days. While you may take a 30 year loan, most borrowers will either upgrade their house or switch their home loan within the first five years. 

You’re also expected to know exactly which features you want. This is fine for the experienced borrower, but most people know some flexibility is a good thing, but don’t know exactly which features offer more flexibility than others. 

What is the flexibility score?

Today’s home loans often try to lure borrowers with a range of flexible features, including offset accounts, redraw facilities, repayment frequency options, repayment holidays, split loan options and portability. Real Time Ratings™ weights each of these features based on popularity and gives loans a ‘flexibility score’ based on how much they cater to borrowers’ needs over time. The aim is to give a higher score to loans which give borrowers more features and options.

They’re not always timely

In today’s competitive home loan market, lenders are releasing new offers almost daily. These offers are often some of the most attractive deals in the market, but won’t get rated by traditional ratings systems for up to a year. 

The assumptions are out of date 

The comparison rate is based on a loan size of $150,000 and a loan term of 25 years. However, the typical loan size is much higher than that. Million dollar loans are becoming increasingly common, especially if you live in metropolitan parts of Australia, like Sydney and Melbourne. It’s also uncommon for borrowers to hold a loan for 25 years. The typical shelf life for a home loan is a few years. 

The other problem is because it’s a percentage, the difference between 3.9 or 3.7 per cent on a $500,000 doesn’t sound like much, but equals around $683 a year. Real Time Ratings™ not only looks at the difference in the monthly repayments, but it will work out the actual cost difference once fees are taken into consideration. 

Does Australia have no cost refinancing?

No Cost Refinancing is an option available in the US where the lender or broker covers your switching costs, such as appraisal fees and settlement costs. Unfortunately, no cost refinancing isn’t available in Australia.

Can I change jobs while I am applying for a home loan?

Whether you’re a new borrower or you’re refinancing your home loan, many lenders require you to be in a permanent job with the same employer for at least 6 months before applying for a home loan. Different lenders have different requirements. 

If your work situation changes for any reason while you’re applying for a mortgage, this could reduce your chances of successfully completing the process. Contacting the lender as soon as you know your employment situation is changing may allow you to work something out. 

Can I get a home loan if I am on an employment contract?

Some lenders will allow you to apply for a mortgage if you are a contractor or freelancer. However, many lenders prefer you to be in a permanent, ongoing role, because a more stable income means you’re more likely to keep up with your repayments.

If you’re a contractor, freelancer, or are otherwise self-employed, it may still be possible to apply for a low-doc home loan, as these mortgages require less specific proof of income.