Do You Have A Great Home Loan Rate?

Is It Time to Review Your Home Loan Rate?  How Do You Know When To Refinance?

When you are first shopping for a home loan, a great low-interest rate is usually high on the priority list. But what happens AFTER you’ve set up your loan and have been chipping away at it for a few years?

While it can be tempting to put it to the back of your mind and get on with the more exciting parts of homeownership, it’s worth regularly reviewing your home loan to make sure you still have a competitive rate and the loan is still the right fit for your changing needs.

Is It Time to Review Your Home Loan Rate?

Most experts recommend reviewing your home loan at least every 1 to 2 years to make sure it is still a good fit for your needs and that you are still on a great, competitive interest rate.

It’s also a good idea to review your loan after any significant life events (such as starting a family, marrying or divorcing, or retiring), or if there have been significant changes to your financial situation.

What Are the Signs You Need to Look for Indicating It Is Time to Refinance?

There are several signs that it might be time to consider a refinance, including:

• Your rate and/or fees are no longer competitive, and your existing lender is unwilling or unable to negotiate.
• Your loan no longer suits your changing needs or goals.
• Your financial situation has significantly changed.
• You have built up equity in your home (i.e. there is a large difference between the value of the property and the amount you still owe on your mortgage) and would like to take advantage of this (e.g. by borrowing additional funds for renovations or debt consolidation).
• You would like to consider a shorter or longer loan term than you currently have.
• You own a number of properties and are looking to streamline a number of existing loans.

How Do You Know You Still Have a Good Deal With Your Home Loan?

It pays to speak with your broker to check that your loan is still right for your needs.

Your broker will help you consider a range of factors, including:

• Whether your loan is still at a great rate, or whether considering different lenders or products could help save you money. Lenders pass on interest rate cuts and rise at different times, so that great low rate loan you set up 5 years ago may no longer be the most competitive option on the market.
• Whether the fees you are paying for your loan still represent good value for money. Are you paying for features that you aren’t utilising? Or alternatively, would paying a bit extra for features like an offset account save you money in the long run?
• Whether the loan type and repayment type are still the right fit for your changing needs. For example, would changing from a variable rate to a fixed rate, or from interest-only repayments to principal and interest repayments, be worth considering.

What Can You Do with Your Existing Home Loan?

If your loan itself is still a good fit, but your interest rate is no longer as competitive as it once was, it can be worth negotiating with your lender first to see if they will offer you a lower rate.

If your lender is unable or unwilling to budge on the rate they offer on your particular loan, you can also consider whether switching to another product or loan type with the same lender could help save you money.

It’s worth chatting to your broker first before making any decisions about changing your loan so we can help you consider the risks and benefits of each option.

Can I Refinance If My Home Loan Is Fully or Partly on a Fixed Rate?

If all or part of your loan is on a fixed rate, it can be extremely costly to refinance during the fixed term period. This is because lenders charge a ‘fixed rate break fee’ if you payout, close or make significant changes to the value of your loan during the fixed-rate period. The total break cost is calculated using a complex formula that takes into account how much of the fixed period remains and the current cost of wholesale funds.

If you are considering refinancing a fixed-rate loan, your lender will give you an estimate of your break costs. We can then help you calculate whether a refinance is still worthwhile or whether you are better off waiting out the remaining fixed rate term before refinancing.

Depending on your reason for wanting to refinance, we may also be able to discuss alternative options with you.

For example, if you are considering refinancing to release equity from your home to fund renovations, this may be still possible by ‘topping up’ or increasing your existing borrowing with your existing lender.

Is It Worth Refinancing for a Small Difference in Interest Rate For A Home Loan?

It can be, but the interest rate is only one factor that determines whether a refinance is worthwhile.

It’s also important to consider the fees and charges on your current loan vs the new loan you are considering, as well as the costs you will incur during the refinance. Most lenders charge an establishment fee for new loans and a mortgage discharge fee for closed loans.

Can I Refinance My Home Loan Too Often?

Lenders treat refinances as brand new loan applications, and each one will appear on your credit report.

Constantly shopping around for credit products (such as home loans, car loans and credit cards) can, unfortunately, lower your credit score and make lenders nervous – they see overly frequent credit applications and a warning sign of financial hardship.

Refinancing every few years is unlikely to be a concern unless there are other issues with your credit history.

The cost of frequent refinancing can also sometimes outweigh any savings you would make, so constantly refinancing may not save you any money in the long run.

How Long Does It Take to Refinance?

This generally comes down to the complexity of your financial situation and application, your chosen lender’s turnaround time in approving your new loan, and the outgoing lender’s turnaround time in preparing to discharge your existing mortgage.

It can range from a few days through to several months for your application to be assessed by the new lender, with most applications taking around 2 weeks from the beginning to the end of the assessment process. It can take an additional several weeks after this to ‘settle’ the loan; that is, for all the money to change hands and for the incoming lender to take over the loan from the outgoing lender.

What Happens If You Have Just Lost Your Job and Bank Says No to Refinancing?

Lenders require evidence of your ability to repay any proposed loan or refinance.

Even if a refinance would save you money or lower your repayment, you must be able to demonstrate that you are able to repay the loan.

In the event that you have lost your job or are experiencing financial hardship, we can help you get in touch with your lender’s hardship team to discuss alternative repayment arrangements for your existing loan.

We’ll also work with you to help determine when you are once again in a position to refinance and whether that is a suitable option for you.

What Happens If Your Borrowing Capacity Has Dropped?

Refinances are treated as new loan applications, so a new lender will need to assess your borrowing capacity to make sure you can afford the new loan. This can be a problem if you borrowed at the very top of your borrowing capacity in the first place, and your borrowing capacity has dropped since then.

Unfortunately, each time interest rates increase, your borrowing capacity decreases. This is because as rates go up, your monthly loan repayments go up to cover the increased interest payable, meaning your funds simply don’t stretch as far and you can afford to borrow less overall. Increases in the cost of living can also have a negative impact on your borrowing capacity because less of your income is available to direct towards your loan. 

Furthermore, changes to the way loans are assessed can also reduce your borrowing capacity. Since October 2021, APRA has required lenders to assess borrowing capacity using a buffer of an extra 3% above the current interest rate offered by that lender, up from an average of 2.5% previously. 

These factors mean that someone who borrowed at the top of their capacity, particularly during a period of low-interest rates or assessment rates, may find they are no longer able to refinance the amount they already owe as their borrowing capacity has dropped too low, even if their income has stayed the same.

If your income has remained stable since you took out the loan, but your borrowing capacity has dropped due to one or more of the factors mentioned above, there may still be an option to refinance dollar-for-dollar without needing to go through a new serviceability assessment.

As of March 2023, only one lender will currently consider this option and they do so on a case-by-case basis.

To be eligible, you must meet strict criteria including a clean loan repayment history for at least 12 months, the new loan must be in the same name as the previous loan, there must be no change to your primary income source, the loan size must be below 80% of the property value, and the interest rate on the new loan must be lower than you are currently paying.

As this can only be done on a case-by-case basis, it is important to talk to your finance broker to see if this option may be suitable for you. If you are unable to refinance now, we’ll continue to work with you to help put you in the best possible position and will re-evaluate your options regularly.

Does My Broker Lose Money If I Refinance?

In some cases, yes.

Finance Brokers are generally paid a commission by lenders for each loan they set up, which is why brokers are able to provide many services at no charge to clients. Any commission your broker will earn must be disclosed to you before the loan is set up.

Most lenders will ‘clawback’, or reverse all or part of the commission paid to a broker if that loan is closed or refinanced away within the first 18 months to 2 years after it is set up. (This also applies if the property is sold.)

This is just one of the reasons why it’s so important that we fully understand your situation, needs and goals, and that you are matched to a loan that best suits your needs from day one and will continue to suit you for many years to come.

If you enjoyed this article, you may be also interested in our Article regarding ‘The Pros and Cons of Fixed-Rate Lock on Loans’ here.