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When it makes sense to refinance…and when it doesn’t

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Switching home loans can be a really smart move under the right circumstances, but there are also times you’re better off staying with your current mortgage.

If you refinance at the right time, you could take advantage of lower monthly repayments and be able to pay off your mortgage sooner, or access some of the equity in the property to finance another purchase.

However, there are often upfront and ongoing costs associated with exiting a home loan and switching to the new one – so it pays to do your research and crunch the numbers before making a decision.

When it could be a good idea to refinance

Most people refinance to save money – so switching to a new home loan could make sense if the total cost of a new loan would be less than the total cost of your existing loan. But remember that the ‘total cost’ isn’t just based on the interest rate alone. You should also consider:

  • Discharge fees
  • Loan establishment/application fees
  • Mortgage registration fees
  • Ongoing loan service fees
  • The revert rate – the interest rate that the new loan will revert to after an introductory period (if applicable)

If you’d still come out on top after refinancing, it could be a good time to make the switch.

While most borrowers want to refinance to cut down on their mortgage repayments, some people are also looking for a new loan that’s better suited to their needs.

For example, a borrower who has built up significant savings might want to switch and take advantage of a new home loan with an offset account.

To that end, it could make sense to refinance if you find a new home loan with attractive features you’re currently missing out on, such as:

  • An offset account – to reduce the amount of interest you’re charged by offsetting your savings balance against your loan balance
  • Extra repayments – the option to make additional repayments and pay off your mortgage faster
  • Repayment holiday – the option to take a break from your usual repayment schedule
  • Loan portability – the ability to take your existing loan with you if you move home

The potential savings on a new home loan can be quite significant if you haven’t had a look at your existing home loan recently.  Well recently was able to save one borrower 1.45%!

When you might not want to refinance

While it’s a good idea to review your mortgage from time to time, there are some situations in which it might not make sense to refinance:

  • You can negotiate with your lender – if you call up your lender and threaten to move, your lender might be willing to match the rival lender’s interest rate or features, or come close
  • You have a small loan – if your loan is small, switching might cost you money or might deliver too small a return to justify the time and effort
  • You have a high loan-to-value ratio (LVR) – if falling property prices have pushed your LVR above 80%, you might be forced to pay lender’s mortgage insurance (LMI) when refinancing, which could cancel out any savings
  • There are hidden costs – as mentioned above, if your new loan has higher fees or reverts to a higher rate after an intro period, it might end up costing you more over the long run than your existing loan

If you’re considering refinancing, you’ll ideally be able to switch to a new loan that not only offers a lower interest rate and lower total cost, but also better features.

While you might not be able to tick every box, refinancing could be the right decision if you find an enticing loan that strikes a balance between affordability, flexibility and suitability for your current circumstances.

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