The art of refinancing
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 and taking numerous considerations into account. Whether you plan on external or internal refinancing, here’s what to keep in mind.
Understand the different types of refinancing
While many people think of refinancing as switching lenders, you can also choose a better deal but stay 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 And according to Finder’s Housing Market Report 2023, while in 2019 just over half of refinancers were external refinancers, by mid-2023, this had jumped to 72%.ii
Know the market and interest rate movements
As the stats show, in recent times more mortgage holders than ever, are swapping lenders in order to chase a better deal. Often this is the main goal – to refinance to get 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 take on whether now is a good time to refinance.
Assess your financial health
It’s then time to look at your financial situation, so you have a clear understanding of your credit score, current financial position and 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 have shifted, especially given the higher cost of living at the moment.
Understand your loan
Whatever your reasons for wanting to refinance are, 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. You can chat to your current lender to see if there are any benefits you haven’t been utilising or costs you are unaware of.
Understand refinancing costs
A follow-up from knowing 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.
Consider 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 is the possibility that you skip out on a mortgage payment (should the refinancing process take longer than expected, for example), this will 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.
