Refinancing is one of the many ways you can save on your home loan. Sometimes referred to as switching, refinancing allows you to look for a lender that offers a more competitive rate that suits your current financial circumstances.
There are many reasons why borrowers decide to refinance their loan. Aside from looking for a better home-loan offer, you can refinance to consolidate all your debts into your mortgage. You can also switch your lender if you are planning to take on big purchases like buying a car or funding a home renovation. Borrowers who may be struggling with mortgage repayments also have the option to refinance their loans over a longer timeframe.
Is there a right time to refinance? How long before you can refinance your home loan?
In fact, there is no definite right time for you to refinance — you can even refinance within the first year of your home-loan approval. However, there are certain things you can do to make sure that your decision to switch is worth all the effort and fees you have to shoulder.
Timing your refinancing with the equity on your home
One of the very first things you should consider when refinancing your mortgage is the equity you have already built up in your home. Equity is the difference between your property's value and the amount you still owe on your property.
You will be in a great position to refinance when you have at least 20% equity in your home. Equity is one of the things lenders look to assess the risk of lending you money. This means that the higher equity you have on your property, the higher the chances of you getting a more competitive deal.
While many lenders allow you to borrow as much as 95% of your property's value, it is still advisable for you to only borrow 80% at maximum — in time, this will give you better chances when refinancing.
If you still have a long way to go before you reach the minimum equity, don't fret, as you can still apply for refinancing. However, your bank will require you to shoulder a lenders mortgage insurance (LMI) policy again. LMIs are expensive — they can cost thousands of dollars, which may defeat the purpose of refinancing.
LMIs are not transferable to another lender when you refinance. However, you can check with your bank if rebates are possible when you terminate your LMI. It is important to note, though, that most policies do not offer rebates when the loan is already one to two years old.
Waiting for your fixed term to finish
As a rule of thumb, it is a must for you to reassess your home loan every two to three years. When you do, compare it with other home loans currently in the market and check for their comparison rates and other loan features.
If you have locked in your loan over a fixed period, it would not be a good idea to refinance within the term. Most banks charge exit fees when you decide to switch to another lender while still being in a fixed period. The strategy here is to start looking for refinancing options only in the last few months before the fixed period expires.
Watching the interest-rate movements
A slight increase in interest rate can make a significant change in your monthly dues. When your lender hikes your loan's rate more than what was set by the Reserve Bank of Australia, consider refinancing your loan to another lender with a more competitive rate.
Be careful, however, when making decisions based purely on interest rates. Consider the costs of switching a loan before you go after a cheaper rate. There are instances wherein it would be better for you to stay put and wait for a better position to refinance.
Be careful when refinancing your home loan
Refinancing is not necessarily an easy way out. Your financial goals and personal circumstances will ultimately help you decide if the timing is right to refinance.
Deciding to refinance a home loan is essentially going back to the beginning — you will go through another loan application process, and there are no assurances that you will get approved easily.
As stated earlier, refinancing usually involves costs: from loan establishment fees to exit fees, break costs, and LMIs. Be sure that when you refinance, you are prepared to shell out some cash to cover these additional fees.