Refinancing your home loan has the potential to save you thousands, reduce your monthly repayments, and free up your finances to achieve your goals.
However, mastering the art of refinancing requires strategic planning, an understanding of the process, as well as taking numerous considerations into account. Whether you plan on external or internal refinancing, here’s what to keep in mind.
Understanding the different types of refinancing:
Many people think of refinancing as switching lenders. However, you can also choose a better deal while staying with your original lender. Refinancing through your original lender but opting for a different deal, is referred to as an internal refinance. External refinance is where you find a different lender.
In 2023, it was reported that Australia had the largest boom in mortgage refinances in history over the past three years. i According to Finder’s Housing Market Report 2023, in 2019 – just over half of refinancers were external refinancers; by mid-2023, this had jumped to 72%. ii
Knowing the market and interest rate movements:
As the recent stats show, more mortgage holders than ever, are swapping lenders in order to chase a better deal. More often than not, the main goal is to refinance at a lower interest rate.
Given the fluctuations in the market and the rise and fall of interest rates, it’s smart to keep informed as to what’s happening. It’s also a good idea to touch base with a financial expert to get their insights on whether now is a good time to refinance.
Assessing your financial health:
Then it’s time to look at your financial situation. It’s good to have a clear understanding of your credit score, current financial position – equity, income, and debt-to-income ratio.
It may have been some time ago that you last did this and it’s likely that some things may have shifted, especially given the current higher cost of living.
Understanding your loan:
Whatever your reasons for wanting to refinance, you need to understand what your current
commitment is and what changes you want to make.
Read through your current loan’s terms and conditions, as it may have been a while since you’ve
checked them. Reach out to your current lender to see if there are any benefits you haven’t been
utilising or costs you may be unaware of.
Understanding refinancing costs:
A follow-on from knowing the conditions of your loan, is ensuring you have a clear understanding of refinancing costs. While the lure of a better deal can be hard to resist, you may find that it may cost you more than you had thought.
Calculate your break-even point to determining if refinancing is beneficial. This includes taking any valuation fees and payout costs (such as exit fees) into consideration. If you are on a fixed rate home loan, you may need to pay a break free if you refinance.
Considering the impact on your credit score and LVR:
Another thing to be aware of is how refinancing can impact your credit score. Aspects that come along with refinancing, such as ending a loan and needing another credit check, can cause your credit score to dip. And if there’s the possibility that you skip a mortgage payment (for example, should the refinancing process take longer than expected), this could further damage your credit score.
Loan to Value Ratio (LVR) is the difference between the amount you’re borrowing to the value of the property. If your LVR is over 80%, you need to pay Lender’s Mortgage Insurance (LMI). When refinancing, it’s likely that your LVR has shifted due to your mortgage repayments, so your LVR tends to be lower as a result. However, if your property has fallen in value and your LVR has risen, then you may need to pay LMI when refinancing.
Clear Sky Financial are always available to answer any questions you may have. Get in touch today so we can discuss and investigate your options.
i https://www.macrobusiness.com.au/2024/03/mortgage-refinancing-boom-turns-bust/
ii https://www.finder.com.au/home-loans/housing-market-report
Information contained in this document is considered to be true and correct at time of publication. In addition, the information provided is general information only, and does not take into account any individuals’ objectives, financial situation and needs. Before acting on any information contained herein, you should consider the appropriateness of the advice having regard to your personal objectives, financial situation and needs.