When can you refinance a home loan?
You can refinance your home loan whenever you like, but it’s usually best to wait at least two years after your original loan has settled. Refinancing involves paying off your old loan and starting a new one, which comes with costs. So, you’ll want to be sure you’re getting a much better deal.
When’s the best time to refinance?
The best time to refinance depends on your personal needs and goals, but here are some common scenarios when it might be worth it:
- You’re coming off a fixed rate and being moved onto a higher variable rate.
- Interest rates have dropped significantly below your current variable rate.
- Interest rates are at a low point in the cycle, and are expected to rise, so you may find value in switching to a fixed rate home loan.
- You’ve built up a considerable amount of equity in your home and it may allow you to secure a better interest rate.
- You want to consolidate your high-interest debt (e.g. personal loans or credit card debt) into a lower-interest mortgage.
- You need to access cash for major expenses, like renovations, through a cash-out refinance.
- Your credit score has improved meaning you are no longer limited to bad credit lenders.
- You’re not happy with your current lender and the level of service you’ve received.
- If you’re borrowing more than $800,000 as lenders tend to favour larger loan amounts (you may still get a good refinance deal on a loan under $800,000).
- Divorce or separation.
How often can you refinance?
You can refinance as often as you like, but it’s best to review your loan annually and consider refinancing every 2-3 years. Keep in mind that refinancing requires paperwork and time for approval, so a small amount of savings might not justify kicking off the process.
How soon can you refinance a home loan?
Technically, there are generally no restrictions on how soon you can refinance your home loan, but your reasons for doing so should be crystal-clear. That’s because lenders may view refinancing too soon as a red flag, as it could indicate financial problems or other concerns.
Lenders could also simply be more hesitant about borrowers who switch lenders very frequently and might not stick around for long.
Refinancing can also impact your credit score temporarily, so you’ll need to keep that in mind if you’re planning to make any other financial applications soon, like a credit card or personal loan.
It’s best to get your finances in order at least six months before refinancing. This means having no missed payments on bills, credit cards, loans or extravagant spending. Lenders will also look at how you manage your money, including any frequent or unusual cash withdrawals, to assess if you can service the new loan.
Most popular time to refinance in Australia
- According to the latest ABS Lending Data, the most popular time for owner-occupiers to refinance their home loan is during the months of May, June and July.
- It’s a similar trend with Investors, with more borrowers refinancing in the middle of the year in May, June and July.
When refinancing may not be worth it
Your LVR is greater than 80%
If you’re borrowing more than 80% of your property’s value, you’ll likely need to pay lenders mortgage insurance (LMI), even if you’ve already paid it on your current mortgage. In most cases, the interest rates on offer will be much more attractive if your loan-to-value ratio (LVR) is between 60-80% because you’re borrowing less compared to your home’s value. If your LVR is above 80%, then it’s usually not worth refinancing, but there may be exceptions.
There are high fees attached
The cost of refinancing can be high in some cases, so you need to make sure the benefits of switching loans outweigh the fees. Potential costs can include valuation fees ($100-$600), establishment fees ($200-$1,000), and ongoing monthly or annual fees ($10-$400), among others.
You’re currently on a fixed rate
There will be higher break costs compared to a variable rate loan. However, if your fixed rate is particularly high relative to the best home loan rates available, it might still be worth it.
You’re close to paying off your mortgage
It comes down to calculating the costs and whether it’s going to save you any money during the remainder of your loan term. You might be better off contacting your lender and simply asking for a better rate.
If your financial situation has changed
Your circumstances are going to make it harder to get approved for a new loan, such as if you've taken on debt elsewhere or your income has dropped.
What if the interest rate on the refinance home loan is only marginally lower?
You might need to refinance to a much lower interest rate for it to make a real difference. This is because the savings you get from a lower rate can be eaten away by the fees involved in refinancing. Below is an example:
- Let’s say your current home loan is $420,000 and the market value of your property is $600,000. Your interest rate is 6.60% with 26 years remaining, meaning your current repayments are $2,820 per month
- You look to refinance and the lowest rate you’re offered is 6.49%, shaving your repayments down to $2,791 per month
- While the lower rate seems attractive, the new loan has an application fee ($600), a valuation fee ($400) and an annual package fee ($400). In total, $1,400
- Monthly repayment savings = $29
- To recover the $1,400 in fees through the $29 monthly savings: 1,400 / 29 = 48.27
- It’ll take about 48 months (4 years) to break even
- This scenario assumes the interest rate will remain the same over this period
