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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:

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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:

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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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