When Should You Refinance?

Refinancing is a hot topic right now given the historically low interest rates and Cash Back incentives lenders are offering to new clients refinancing from other financial institutions. At the time of writing, current rates on the market are in the low 2% pa range with cash back offers around the $2,000 to $4,000 range.

Whilst there are benefits for refinancing, there are also drawbacks that you need to be aware of. So, in this article, we will be addressing some of the benefits and drawbacks of refinancing, as well as how to determine when you should refinance in general terms.

Some of the benefits of refinancing

  1. Moving to a lender that is offering cheaper rates and fees than your current lender;
  2. Moving to a lender that has specific features that you would like, that your current lender does not offer;
  3. Taking advantage of better terms and/or incentives offered by alternative lenders to your incumbent lender;
  4. Extending interest only periods and/or the overall loan term if your incumbent lender refuses to do so;
  5. Moving to a lender that provides more flexibility in loan structures;
  6. Moving to a lender that provides better customer service;
  7. Gives you an opportunity to look at the suitability of your current finance structures in line with your current circumstances.

Some of the drawbacks of refinancing

  1. Refinancing requires a full new application and therefore you will be required to provide all your information and go through the application process again;
  2. You can unwittingly add years back on to your loan if you inadvertently allow your loan term to be reset to the maximum. This will then add on further interest costs overtime, potentially negating the benefits of refinancing for a better rate;
  3. Refinancing too often may result in the perception that there is something wrong and that perhaps you are experiencing mortgage stress and possibly being asked by your lender to refinance;
  4. Refinancing to a particular lender and/or product just to take advantage of incentives may result in you taking on a loan product or moving to a lender that may not suit your circumstances and therefore may lead to a poor experience or worse, mortgage stress (read more about managing mortgage stress in our article here).

Now that we have an idea of some of the benefits and drawbacks of refinancing (note, the above is note exhaustive), we can address when you should think about refinancing and how to determine if it is right for you.

When should you refinance?

In general terms, you should think about refinancing in the following situations:

  1. If your lender refuses to lower your interest rate and/or fees to match the competitive rates on the market;
  2. If the potential savings from the interest rate reduction outweigh your current interest costs plus refinance costs;
  3. If the incoming lenders fees are the same or lower than your incumbent lender’s fees and there is some other benefit to you in moving;
  4. If you stand to gain in terms of flexibility, some other favourable features or better customer service;
  5. If you are not having to compromise on product features (that are essential to your circumstances) to achieve the best rate;
  6. If your current loan structure or features no longer complement your overall borrowing and/or wealth creation strategy;
  7. If your current loan structure or features no longer suit your personal circumstances;
  8. If your credit profile and borrowing capacity allows you to do so. Sometimes due to lender policies changing over time, some borrowers can find that on paper they cannot demonstrate capacity to service existing debts. Whilst unfortunate, this is not uncommon and can lead to borrowers becoming ‘mortgage prisoners’. In this case a refinance may not be possible, and you may need some specialist advice.

The above is just a brief guide and there are many more factors that should be considered before you decide to refinance. However, the point of this article is that refinancing can be beneficial and can help you to pay off your loan sooner (download our eBook to learn 10 Tips to Pay Your Home Loan off Faster)if done correctly and in line with your specific circumstances.

Whilst achieving the cheapest interest rate is something that we always try to do, sometimes it is not the most important factor depending on your personal situation. This can be a contentious statement, however, what is the point of the cheapest rate loan if it fails to address your other needs and requirements?

We would always encourage you to take into account your personal situation as well as the loan type, features, limitations and costs to ensure that the prospective loan is compatible with your circumstances holistically. This can often be a tough task, especially if you are time poor. If this is the case, don’t stress, we do this every day and can help you to narrow down an appropriate solution to suit your needs.

So, if you would like to take advantage of the current interest rates and incentives on the market, feel free to contact us now so that we can help you navigate the available options and make sense of the lending landscape. We will try our best to alleviate you from as much of the heavy lifting as possible. You will also have the benefit of leveraging off our extensive panel of lenders consisting of all the major banks, non-bank lenders and specialist lenders.

Disclaimer: The information provided herein is for general information purposes only and does not constitute specific advice. It should not be relied upon for the purposes of entering into any legal or financial commitments. Specific advice should be obtained from a suitably qualified professional before adopting any investment/financial strategy.