When to refinance your home loan

Everyone’s circumstances are different, however there are certain times when refinancing your home loan can be more beneficial than others. Historically, the general advice in finance circles was to only contemplate refinancing if there was 1-2% difference between the loan you are repaying and the loan you are considering, such was the burden of break costs and other fees. It was also an era when the mindset around home loans was usually "set-and-forget".

In 2020, with interest rates at all-time historic lows, the home lender market is extremely competitive. Plus, discharge fees on variable interest loans are now much smaller due to government regulation introduced in 2011 which abolished early exit fees (these may still apply for home loans secured before 2011, so speak with your bank if that is the case).

The upshot is that the benefits of refinancing are often more easily achieved than in previous years. As usual, it all comes down to doing the sums. 

When interest rates drop

In a market like this one, where there have been several cash rate drops by the Reserve Bank of Australia and loan rates are at historic lows, your home loan may no longer be competitive, depending on your lender’s other customer commitments and policy strategy. When it is time to compare your home loan with what's available, comparison sites like Canstar, Rate City and Finder show a range of loans and their features and conditions which can give you a top-line look at what is available.

A low-rate environment may be a good time to explore fixed rate loans. These loans sometimes have attractively lower rates than variable rate loans, so fixing your rate can provide mortgage repayment certainty for the term of the fixed rate period, usually 1-5 years. However, fixed rate loans generally restrict how many extra repayments you can make, and don't offer the same flexibility as most variable rate loans. Check out IMB's range of home loans to see which best suits your needs with regards to features, flexibility and certainty.

Of course, there will be costs of switching. A discharge fee usually applies to exit your current loan and application fees may apply with the new loan, so you will need to crunch the numbers to see how worthwhile the change may be. Find out more about the costs involved in refinancing in how to refinance your home loan.

 

Your LVR is less than 80%

Most lenders offer better rates for owner-occupiers who have an 80% LVR (Loan-to-Value-Ratio) or better. That is, that the loan value is less than 80% of the property value (as valued by the bank). In fact, most specialist online refinance lenders won’t lend to anyone with an LVR higher than 80%. Some lenders will supply loans for buyers/refinancers with up to 95% LVR, or only 5% deposits (for new home buyers) or equity (for refinancers). These loans will usually have higher interest rates to offset the risk and will incur Lender's Mortgage Insurance (LMI) Insures the lending institution for any losses it incurs should the borrower default and the property needs to be sold. LMI is paid for by the borrower if they have a less-than-20% deposit of the purchase price. LMI can cost several tens of thousands of dollars, and increases exponentially the more you borrow.. Refinancing with such a high LVR may not be the most cost-effective option over the long term. 

Here is how the LVR on your property can change over time. If you bought a home worth $500,000 and borrowed $475,000 with a 5% deposit of $25,000, then the LVR is 95%. If over 5 years, you have paid $50,000 of the principal and your property has stayed the same value, then your LVR is 85%: 425,000/500,000.

If, however, the property has increased in value over that 5 years, to, say, $600,000, then your LVR would be 71% because of the increase in equity. This could open you up to a better interest rate and it may be worth shopping for a refinance loan. 

Property Value

Loan Value

LVR

Lender’s Mortgage Insurance req’d?

$500,000

$475,000

95%

Yes

$500,000

$425,000

85%

Yes

$600,000

$425,000

71%

No

Calculations should be used as an indication only. 

Speak with an IMB refinance specialist  they can help you establish your LVR position easily.

 

At the close of a fixed interest loan term

Coming out of a fixed interest loan term is a perfect time to look at refinancing, as most fixed interest loans will revert to a standard variable rate at the end of the term, which is usually much higher than other competitive rate loans. Market fluctuations over the term of your fixed loan could mean there are better value loans – fixed or variable – now available. It’s worth looking around. An advantage of IMB’s highly competitive fixed rate loans is that they will revert to a discounted variable rate, rather than the standard variable rate. You can reach out to our team to find out more about our fixed rate loans or call us on 133 462.

 

When your circumstances change

For the better

Have you earned a promotion recently or has your partner secured a new job? Have you inherited a windfall, or bought an investment property and are receiving rent? These are some situations where changing your home loan for one that has more flexibility – like extra repayments or added features like an offset account and the ability to redraw – may mean that your home loan can work harder for you.

Similarly, you can use your improved circumstances to explore unlocking equity to renovate your home, buy an investment property or holiday home, purchase a new car, buy shares and so on.

For the worse

Conversely, if you are experiencing adverse conditions where money has become tight, like so many are experiencing in 2020 due to the COVID-19 pandemic, then refinancing can be an option to lower your repayments immediately, even if you may pay more in the long run.

The same applies if you have other loans or credit cards that are becoming difficult to pay down along with your home loan. Refinancing your home loan to consolidate your debt into one repayment can ease financial strain in the short term. Remember, as detailed in why refinance your home loan, you will likely end up paying more over the 30-year term of the loan.

Please note: IMB has deferred repayment options for up to three months for home loan customers who are experiencing financial hardship due to the Coronavirus pandemic. This can be extended to six months in some circumstances. If you would like to speak to us about your situation, how we can help, or whether refinancing with IMB is an option for you, please contact us on 133 462 or book an appointment with a refinance specialist. 

 

When not to refinance

Breaking a Fixed Rate Loan Term

The most obvious reason not to refinance is when you have not completed the term for a fixed rate home loan. There is always a risk when agreeing to a fixed rate term that rates will change over the fixed-rate period and may become cheaper than what you are paying. If you choose to refinance during the fixed-rate period you may incur costs known as “break costs”, or “early exit fees”, or “early repayment penalty”.

Why? Banks calculate their break costs in different ways, often based on the Bank Bill Swap Rate, which is the interest charged to your bank on wholesale fixed-rate borrowings. To recover their losses due to the broken deal, the bank will apply its own formula for cost recovery – which includes several other factors – and charge the customer.

Generally speaking, the more that interest rates have reduced since you agreed to the fixed rate, the higher the break costs will be. Break costs can be substantial, often in the many thousands of dollars, so consider requesting a quote before you consider breaking your fixed rate term. It may make sense to finish your fixed rate term and then shop hard. 

 

When your LVR is still above 80%

As stated above, once your LVR drops below 80%, refinancing to a loan with a better rate may be a good option. If your LVR is still above 80% when you choose to refinance your home loan, you will need to pay Lender's Mortgage Insurance (or LMI) again (assuming you paid it with a less than 20% deposit when you first bought your home).

Lender's Mortgage Insurance insures the lending institution for any losses it incurs should the borrower default and the property needs to be sold. LMI can cost several thousands of dollars, depending on your loan amount and how much more than 80% the LVR is on your property. A higher LVR may make refinancing the loan amount not worth the cost of the LMI.

 

You’ve explored why and when to refinance, now find out how to refinance your home loan.

 

 

Important Information:
The advice on this website has been prepared without taking account of your objectives, financial situation or needs. Before you act on this advice you should consider the appropriateness of this advice in regard to your objectives, financial situation and needs. Lending criteria, terms and conditions, fees and charges apply to IMB loan products. You should consider the relevant Terms and Conditions or Product Disclosure Statement before deciding whether to acquire any of the products shown on this website.