Refinancing your home loan can be a smart money move, helping to reduce your repayments and improve your cash flow. But it’s not a decision to make lightly – there are costs involved and the benefits tend to build over time rather than happen instantly. So before you make the switch, it’s worth asking yourself some key questions to see if refinancing makes financial sense for your situation.
Q: Why do you want to refinance your home loan?
A: Firstly, it’s important to understand why you want to refinance. While most people refinance to get a better interest rate, Tomas Khoury, CommBank home lending executive, says this shouldn’t be the only motivator. “A refinancing application takes effort so use the process to comprehensively check everything you’re doing in the borrowing and property space,” he suggests.
“Look at your interest rate but also check what you are getting with your home loan: do you have the right features and benefits to suit your needs? Do you have car loans or a credit card balance that could be rolled into your home loan to consolidate repayments? Gain a clear picture before you refinance to make sure it’s the best option.”
Q: What are the upfront costs of switching lenders?
A: There’s no such thing as a free lunch – or a free refinance. If you want to move your home loan, know what costs you’ll incur to work out whether it’s worth it. “If you move to another lender, you may have to pay discharge fees of up to $600 or $700 to your current lender – although if you’re moving to a lower interest rate, you may get that money back in savings,” says Khoury.
Q: Do you need more flexibility?
A: A cheaper rate can look like an easy win – but it’s worth checking what you might be giving up to get it. Some low-rate loans come with fewer features, which can matter if you rely on flexibility to make your loan work for your budget. For instance, CommBank can offer multiple offsets that may help you save more money than a cheaper interest rate.
Before you refinance, ask yourself: am I switching to lower repayments or because I want more control over how I manage my money? “You might want more flexibility in how you repay your home loan – perhaps you’d prefer to repay weekly, fortnightly or monthly,” says Khoury. Or you might benefit from splitting your home loan. “I’ve helped people set up multiple offset accounts that are allocated for a rainy day account, for school funds, for a holiday, a savings account and an everyday account.”
Q: What are some of the benefits of banking in one place?
A: If you refinance with a new lender, that could impact your day-to-day banking. There are advantages to having your loan and main bank account in one place, including money management being simpler as you can see your whole financial picture in one place. Repayments are generally smoother with less transfer delays and there are fewer accounts to juggle.
If you have a home loan with CommBank, you may be able to convert your everyday transaction account into an offset account. You can then have your salary paid into that account – every day that you have those dollars in there will help reduce interest paid and therefore the time it takes to pay the home loan down. And if you use a credit card with an interest-free period and pay it off in full by the payment due date, you can keep your savings in your offset account for longer and reduce the interest you pay on your home loan.
Q: Is a refinancing cashback offer worth it?
A: Some lenders offer cashback payments if you refinance with them. It can be tempting but what are you sacrificing for that quick financial fix? A cashback offer might come with switching costs or a higher interest rate or ongoing fees. So what you gain upfront, you may actually lose in higher repayments over time. For example, if a cashback offer puts $3000 in your pocket today but your loan costs an extra $50 a month in interest, that cashback benefit disappears after five years. For homeowners planning to stay put for the long run, it’s the lowest long-term cost that matters most.
Q: What could I actually save?
A: Your short-term break-even point is when savings from refinancing outweigh the upfront costs. To calculate this, work out your upfront costs by adding up the discharge fees, any break fees, and application and settlement costs. Then, divide that by your estimated monthly repayment savings.
Keep in mind that mortgages are long-term commitments and assessing real savings requires a longer term analysis. Most people who refinance reset their loan term as part of it but resetting your loan term lengthens the time it takes to pay it off and actually increases the interest you pay over the life of the loan.
For example, if you have 15 years left on your existing home loan then refinanced and reset the loan term to 30 years, you may feel an immediate drop in your repayment amount but you’ll actually end up paying interest for an extra 15 years which could far outweigh the short-term benefits.