When Can You Refinance Your Home Loan?
Is there a right or wrong time to refinance your mortgage? Find out when switching home loans could make a difference to your long-term financial goals.
February 2022 – 10 minute read
What you’ll learn
- When’s the right time to refinance a home loan?
- Why your current financial situation is important?
- Can I borrow more when I refinance?
- Can I refinance more than once a year?
- What else should I consider?
1. When’s the right time to refinance a home loan?
When considering refinancing a mortgage, there are many questions:
- Should I do it now?
- Do I wait for interest rates to drop?
- Is my interest rate competitive?
- Is the timing right for my needs?
- Will I save money?
- Can I refinance a fixed rate home loan?
This is why there are several factors you need to consider when you talk about timing and switching loans:
This question is probably one of the most important. If you’ve had a loan for less than 12 months, refinancing may not add up numbers-wise, as the costs associated with refinancing could outweigh the benefits of a lower interest rate. Look out for application and discharge fees, property valuation fees, mortgage registration fees, search title fees, break costs and other fees, or you may potentially have to pay Lenders Mortgage Insurance.
Suppose the Reserve Bank indicates that interest rates for home loans are going down. In that case, it may be a great time to think about refinancing, especially if other lenders are advertising a better interest rate than your current rate. Or, if rates for home loans are going up, you may want to lock in a fixed rate before the interest rate hike. Either way, it’s wise to approach your existing lender first. Although they can't give you credit assistance, most lenders will renegotiate a lower interest rate to keep your business – a more effortless and cost-effective alternative to refinancing your home loan with a different lender.
To be competitive, many lenders will offer special incentives or bonuses – such as introductory rates for a fixed rate period. Many of these offers have time limits and are dependent on what's happening in the home loan market, so you need to take advantage of them before they close. It could be to your advantage to look for a better deal, but make sure you weigh up all the pros and the cons against your personal circumstances. How long you want your loan will determine whether you wish to take advantage of short-term or long-term savings to interest repayments across the life of your loan. It's also important to remember to look at the comparison rates too when you review a home loan, as a comparison rate will give you the actual cost of the home loan as it includes ongoing fees and the interest rate.
Both good and bad, major life events can impact your financial position, homeownership and investment property goals. Often these events – births and deaths, marriages and separation, job promotion or loss – are the catalysts for change. In many cases, because borrowers are not regularly reviewing their home loans in advance of significant life events, they can be unprepared. Reviewing your home loan periodically and asking your lender for a ‘Home Loan Health Check’ means you can prepare or at least put steps in place to plan for your future home loan needs.
The value of the property you’re mortgaging also impacts whether you can refinance your home loan. If the property value has risen and your equity has gone up, refinancing shouldn’t be an issue. However, suppose the value of your property has decreased, and the loan to value ratio (LVR) has increased. In that case, you could find it very difficult to refinance at a comparable loan amount. Even though you can afford the loan amount and loan repayments on your existing loan, a new lender will want at least an 80% LVR or require you to take out Lenders Mortgage Insurance.
If you're selling your current property and are thinking of buying a new home, it’s a good time to look at refinancing your home loan. With some lenders, you can’t avoid this, but if your home loan has a portability feature, you could keep your current loan and save all the extra paperwork and costs associated with refinancing and a new loan. With portability, you substitute the property securing your loan with another, which is particularly important if you have a fixed rate mortgage. Using your loan's portability feature means you'll not incur break fees.
Refinancing’s not just about the new loan but also your current loan. Make sure you know what’s involved with closing out your existing loan, especially if it's a fixed rate loan.
What you need to watch out for
There are many variables at play when you consider the type of loan (fixed rate loan or variable loan), interest and comparison rate, offers, and features offered by lenders. Before you even contact a lender, you need to look at what’s involved in closing out your current mortgage, as that’s where you could get unstuck.
Closing costs that could impact your switch to a new lender:
- Early exit fees (these can be costly if you refinance before a specified period)
- Fixed rate home loan break costs (if your current fixed period has yet to expire)
- Discharge or settlement fees (approximate range $150 to $700).
2. Why your current financial situation is important?
When you approach a lender or credit provider for a new home loan, they’ll want to assess your ability to repay the loan. That means you’ll need to provide details of your personal and financial situation, proof of income, pay slips and other information to meet their lending criteria. Each lender will have its criteria, but in general, lenders will look for three things, sometimes called the three ‘Ps’ of lending:
Just because you were approved for your existing loan by your current lender, doesn’t mean another lender will approve you for the same amount.
Know your borrowing power
As every lender has different criteria, knowing what you could potentially borrow with your latest financial and personal details is essential.
At Westpac, our handy home loan calculators can help you estimate how much you could borrow as well as what your monthly repayments might be:
3. Can I borrow more when I refinance?
Your ability to borrow more against your property will depend on three things:
- The current value of your property
- The loan to value ratio (LVR)
- Your ability to make the repayments.
When refinancing your home loan, you may be able to increase the amount of your mortgage subject to the lender's credit criteria and their assessment of your application. Your repayments or loan term will increase by borrowing more, so make sure you get a better interest rate.
Why would you want to increase your mortgage when refinancing?
There are several reasons why you might want to increase or ‘top up’ your mortgage:
- Finance home improvements
- Buy an investment property
- Buy a new car or boat
- Debt consolidation
As long as the property valued has a loan to value ratio (LVR) of 80% or less, you should be able to borrow against the accumulated equity.
4. Can I refinance more than once a year?
No rule says you can’t refinance more than once, but it may not be the most practical thing to do, especially if you consider refinancing costs. However, if you have a good reason to do it, or you have no choice and need to sell your property quickly, it can be done. Be particularly careful if your current home loan is on a fixed interest rate as you could be up for break costs as well.
If you’re refinancing, check with your lender first, or if you want information on more than one lender, you may wish to speak to a mortgage broker.
Will multiple refinance applications affect my credit score?
Yes, it might, especially if you’re applying to multiple lenders in a short period. If you’re refinancing within the same year, don’t apply to several lenders, do your homework and decide which lender you’ll use or approach a local broker. Before considering refinancing, it’s always a good idea to talk to your current lender first. They may be able to meet your expectations without having to refinance, which will mean your credit score stays intact.
All it could take is just a 15-minute chat
Avoid the hassles, paperwork and break costs that may be involved when you refinance with another bank. Give us the chance to help you stay. Call 8am-8pm, Mon-Fri and 9am-6pm, Sat (Sydney time): 1800 807 693 or book an appointment.
5. What else should I consider?
Before you make any decisions, you need to be clear on why you want to refinance your home loan. The reasons you’re looking for a new mortgage could be addressed with your current loan by using features that you may not be aware of or changing the way you’ve structured your loan. That’s why before you put in a new home loan application, talk to your current lender and request a review. Keeping your lender means you'll avoid costs and fees such as:
- Discharge or settlement fee
- Property valuation fee
- Mortgage registration fee
- Search title fee
- Exit fees or break costs
- Application fees
- Lenders Mortgage Insurance
What are my options?
No matter what you decide to do, your lender should encourage you to review your home loan regularly, either when there’s a change in circumstances, interest rate, market trends or if you haven’t reviewed your home loan in over 2 years. A good home loan should have the features and flexibility to change with your ever-changing needs. Features and services that you may want to consider, as your needs change, could include the ability to request a repayment holiday, have a transaction account linked to your loan for scheduling repayments or as an offset account which could reduce interest repayments.
Always go to your lender first
If your lender can meet your current lending expectations, you’ll save on all the hassles and costs of refinancing. The same lender can also give you details about features and services that you may not use to the full potential. They should be able to show you how your loan can change as your future needs change.
Ask for a Home Loan Health Check
Westpac customers can get help by calling 8am-8pm, 7 days a week (Sydney time): 132 558 or can book an appointment.
Features you can use instead of refinancing
You don’t necessarily have to refinance your loan if you're buying and selling property. If your loan has a portability feature, it will let you substitute the property held as security against the loan with a different property. Portability benefits mean you avoid the costs associated with a new loan and the need to complete a full application. It’s typically much faster, too, meaning you can keep all the current loan's features like an offset account, interest rate, setups, and structure. There will also be no break costs involved if you have a fixed rate loan and use your portability feature.
Things you should know
Conditions, credit criteria, fees and charges apply. Residential lending is not available for Non-Australian Resident borrowers.
This information is general in nature and has been prepared without taking your objectives, needs and overall financial situation into account. For this reason, you should consider the appropriateness of the information and if necessary, seek appropriate professional advice. This includes any tax consequences arising from any promotions for investors and customers should seek independent, professional tax advice on any taxation matters before making a decision based on this information.
Credit provided by Westpac Banking Corporation ABN 33 007 457 141 AFSL and Australian credit licence 233714.