In this article, we’ll look at refinancing your mortgage – what it is, why you might consider it, when you can do it, how it works, common refinancing scenarios, the benefits of refinancing, and things to consider before you refinance.
What is mortgage refinancing?
In simple terms, mortgage refinancing is the process of taking out a new mortgage loan to repay your existing loan. In some cases, it might be with your current lender, but more often, it involves moving your loan to a new lender. This means you need to apply with the new lender, which may require the payment of fees and costs when you pay out your existing loan, as well as for the establishment of the new loan.
Why might you consider refinancing your mortgage?
Mortgages are typically long-term commitments, sometimes as long as 30 years. And a lot can change during this time – market conditions, your financial circumstances, and general life changes. Any or all of these changes can make refinancing your mortgage an attractive proposition.
Better deals with lower interest rates and fees often makes refinancing an attractive proposition. In addition, the emergence of specialised non-bank lenders, private lenders and fintechs, means that there is increased choice.
When can you refinance your mortgage?
There is no ‘best’ time to refinance your mortgage, but as a general rule of thumb, you should be reassessing your mortgage relative to your situation and personal needs every two to three years and in line with a fixed interest period. There are a few factors to consider in regards to when is the best time to consider refinancing your mortgage:
- Do you have at least 20% equity in your home? This is important so you can hopefully avoid Lender’s Mortgage Insurance (LMI). If you have built up more equity since you took out your loan, this can mean you don’t need LMI for the new loan.
- Are you within a fixed interest term? Generally, it is not a good idea to refinance within a fixed interest period due to the exit fees you may be liable for. Instead, look at refinancing options towards the end of your fixed term period.
- What’s happening with interest rates? This is typically the most important factor when considering refinancing, as this can equate to significant reductions in your monthly repayments and considerable savings over the entire term of your loan.
How does mortgage refinancing work?
The process for refinancing is the same as you would have undertaken when you secured your existing mortgage. You will need to consider the different loans available, including interest rates, whether rates are fixed or variable, and the loan flexibility – such as loan offsets and increased payments.
The good news is that there are a lot of different types of lenders in the market. And, depending on your circumstances, the approval process can be relatively fast.
Importantly, you need to check the terms and conditions of your existing mortgage carefully. In some cases, lenders may include financial penalties for paying out your loan early. This can take the form of break costs or associated fees. Therefore, any savings you expect to make by refinancing need to be considered in the context of any costs to end your existing mortgage. Note too that the application process for the refinanced mortgage will also include fees and charges such as establishment fees, valuation fees, and possibly even LMI depending on the amount of equity you have in your home.
Do your sums, and talk to an expert, such as your accountant or broker, if you’re not sure.
Common scenarios for refinancing your mortgage
There are various circumstances where you might look at your current mortgage and consider refinancing or switching to a new loan and lender:
- Save money: By far, the biggest reason to refinance is to access a more attractive interest rate on your loan.
- Reduce your mortgage term: Getting a better interest rate, while maintaining the same level of mortgage repayments, means your loan can be paid off sooner.
- Access equity in your home: Refinancing your mortgage is a great way to access the equity you have in your home. You may want to renovate, purchase an investment property or even buy a new car. Refinancing can enable you to do this.
- Consolidate debt: You may have a couple of high-interest credit cards or an urgent tax bill that requires payment. Refinancing your mortgage can provide you with access to funds to pay debts.
- More suitable loan: Refinancing your mortgage provides an opportunity to secure a mortgage with enhanced features such as 100% offset accounts, fixed or variable rates (or a combination of the two), or a line of credit.
Also, keep in mind that your financial circumstances may have changed since you initially took out your mortgage loan. For example, you may have paid down and cancelled credit cards or paid off some debt, and this may have helped lift your credit score, thus opening up access to better interest rates than may have been available to you previously.
The benefits of refinancing your mortgage
Your mortgage is likely to be the largest single expense in your household budget, so it pays to ensure it best matches your needs – which can change significantly during a mortgage term. As your financial situation improves, or even if you find yourself in some short-term financial difficulty, it can be very worthwhile to consider your options and secure a more appropriate mortgage loan.
For example, the COVID-19 pandemic has coincided with record low-interest rates. Many people have refinanced their mortgages throughout this time to take advantage of lower interest costs or access equity in their homes for various purposes, such as renovating to improve their work-from-home set-up.
And for mortgages that were established years or even decades earlier, there is a wide range of more flexible and suitable mortgage products available from a new breed of lenders beyond the big banks, offering more attractive terms and conditions that can better reflect your individual circumstances.
5 things to consider before refinancing your mortgage
There are many good reasons why you might consider refinancing your mortgage and some potentially significant benefits from doing so. Before you go ahead, consider these five factors:
- Interest rates: Check current interest rates offered by different lenders and compare them to your current mortgage rate.
- Your equity: Determine the equity you have in your property (based on its current estimated value) – you generally need at least 20% to avoid LMI if you refinance.
- Refinance costs: Work out the costs of discharging your current loan (break costs and fees) and the costs associated with obtaining a new loan (application, valuation and establishment costs and fees).
- Your credit rating: Applying to refinancing your mortgage is considered a credit application, and if you apply and are rejected, it could negatively affect your credit score.
- Why you want to refinance: What is the reason you want to refinance your mortgage? Is it to get a better interest rate, access equity in your home, debt consolidation, or more flexible and suitable loan terms? This will help you decide which loan will best suit your particular circumstances.
A mortgage is a big financial commitment, generally over a long period. It is worth reviewing your mortgage every few years to make sure it suits your needs and reflects current interest rates.