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.

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 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 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.

Can I take a personal loan after a home loan?

Are you struggling to pay the deposit for your dream home? A personal loan can help you pay the deposit. The question that may arise in your mind is can I take a home loan after a personal loan, or can you take a personal loan at the same time as a home loan, as it is. The answer is that, yes, provided you can meet the general eligibility criteria for both a personal loan and a home loan, your application should be approved. Those eligibility criteria may include:

  • Higher-income to show repayment capability for both the loans
  • Clear credit history with no delays in bill payments or defaults on debts
  • Zero or minimal current outstanding debt
  • Some amount of savings
  • Proven rent history will be positively perceived by the lenders

A personal loan after or during a home loan may impact serviceability, however, as the numbers can seriously add up. Every loan you avail of increases your monthly installments and the amount you use to repay the personal loan will be considered to lower the money available for the repayment of your home loan.

As to whether you can get a personal loan after your home loan, the answer is a very likely "yes", though it does come with a caveat: as long as you can show sufficient income to repay both the loans on time, you should be able to get that personal loan approved. A personal loan can also help to improve your credit score showing financial discipline and responsibility, which may benefit you with more favorable terms for your home loan.

Why should I get an ING home loan pre-approval?

When you apply for an ING home loan pre-approval, you might be required to provide proof of employment and income, savings, as well as details on any on-going debts. The lender could also make a credit enquiry against your name. If you’re pre-approved, you will know how much money ING is willing to lend you. 

Please note, however, that a pre-approval is nothing more than an idea of your ability to borrow funds and is not the final approval. You should receive the home loan approval  only after finalising the property and submitting a formal loan application to the lender, ING. Additionally, a pre-approval does not stay valid indefinitely, since your financial circumstances and the home loan market could change overnight.

 

 

How can I get ANZ home loan pre-approval?

Shopping for a new home is an exciting experience and getting a pre-approval on the loan may give you the peace of mind that you are looking at properties within your budget. 

At the time of applying for the ANZ Bank home loan pre-approval, you will be required to provide proof of employment and income, along with records of your savings and debts.

An ANZ home loan pre-approval time frame is usually up to three months. However, being pre-approved doesn’t necessarily mean you will get your home loan. Other factors could lead to your home loan application being rejected, even with a prior pre-approval. Some factors include the property evaluation not meeting the bank’s criteria or a change in your financial circumstances.

You can make an application for ANZ home loan pre-approval online or call on 1800100641 Mon-Fri 8.00 am to 8.00 pm (AEST).

How long does Bankwest take to approve home loans?

Full approval for a home loan usually involves a property valuation, which, Bankwest suggests, can take “a week or two”. As a result, getting your home loan approved may take longer. However, you may get full approval within this time if you applied for and received conditional approval, sometimes called a pre-approval, from Bankwest before finalising the home you want to buy.  

Another way of speeding up approvals can be by completing, signing, and submitting your home loan application digitally. Essentially, you give the bank or your mortgage broker a copy of your home’s sale contract and then complete the rest of the steps online. Bankwest has claimed this cuts the approval time to less than four days, although this may only happen if your income and credit history can be verified easily, or if your home’s valuation doesn’t take time.