Making the switch? 5 questions to ask when refinancing your home loan

With RBA rate hikes rapidly approaching their peak, more Aussies than ever are jumping ship from home loans that no longer work for them. But there are a few things to consider when making the switch: call them certified reality clarifiers. 

Here are five questions to ask when refinancing your mortgage.

What’s not working for you at the moment? Seems simple enough, but starting with what’s making you unhappy in the first place is useful.

For example, are you:

• Unhappy with your current interest rate?
  
• Dissatisfied with the features?
  
• Stressed about your repayments?
  
• Annoyed with poor customer service? 
  

If the answer is ‘yes’ to only one or two of these questions, there are workarounds that don’t involve refinancing. For instance, you may be able to negotiate a better interest rate or devise a game plan for staying on top of your repayments. Most lenders would much rather work with you than lose you!

However, refinancing could be a clean slate if the problems have been piling up for a while now. It all depends on what feels like a dealbreaker to you.

Home loans can come with a suite of features, so it’s important to know which ones you’re after. Here are some common ones, and why they’re useful.

• Offset account. An offset account is a type of bank account attached to your home loan that reduces interest on your repayments. Essentially, you only pay interest on the loan debt minus the balance of your offset account. So if you borrowed $500,000 and have $20,000 in a 100% offset account, you ultimately only pay interest on $480,000. 
  
• Free extra repayments. Free extra repayments mean if you find yourself with extra cash on hand (maybe after a nice tax return), you can put it towards your home loan to pay it down early. Paying down more of your principal now can help you save on interest later. Some lenders will let you make extra repayments but they may charge you a fee or limit the amount you can put in, so it’s important to pay attention to the strings attached. Make sure ‘free’ actually means free!
  
• Redraw facility. Making extra repayments can be handy, but what happens if you need the funds back later? A redraw facility lets you dip back in. 
  
• Discounts. Mortgages designed for refinancers may come with discounts, such as a two-year introductory interest rate or a cumulative discount like Unloan. You may also get perk discounts for other banking products from the lender: it’s useful to check out all the bells and whistles, because saving in one area of life could mean having more for another.
  
• Cashback. As a happy bonus, many lenders even offer up to $5,000 cashback when you refinance. It shouldn’t be the only reason to switch, but it can certainly sweeten the deal.

Same as the first go around, put yourself through a DIY serviceability test and figure out your budget. How much can you afford to pay? Consider interest, fees, and monthly repayments.

Running your numbers through a mortgage calculator can help show you your upper and lower limits in terms of interest rates, loan terms, and however much is left on your principal balance. Arming yourself with some specific numbers can make sorting through offers that much easier.

PRO TIP: Be wary of introductory or welcome interest rates when making decisions about variable home loans. If the interest rate reverts after two years to something outside your budget, you’ll need a Plan B.

When refinancing your home, it’s vital to consider how much you’ve already paid into it. Your new lender will want to get a property valuation done to establish your equity, which is reflected in your loan-to-value ratio (LVR).

If your property has experienced capital growth, the value has increased and thus you likely have more equity. If your property has lost value, you may have lost equity. 

Some refinance offers have minimum LVRs you need to qualify for. Most of the lower interest rates on the market also require a low LVR (generally under 80%), so if you bought at a high LVR relatively recently, you might still need to qualify for the rate you want.

Time is money, so if you’re planning on selling your home soon, refinancing now might not give you enough time to make the savings financially worthwhile. However, refinancing can be a game-changer to your budget if you’re in it for the long haul. 

You may also want to consider what loan term you’re looking for since longer terms can add to the amount of interest you ultimately pay and drag out the timeline of your repayments. However, shorter loan terms may mean more expensive monthly repayments because you’re paying off bigger chunks of your principal.

Alternatively, now’s a great time to weigh the pros and cons of fixing your interest rate for a few years.

Not many people think about their credit score, but it’s a vital part of the home loan process. Request a free credit check to make sure you’re in the right place. 

Compare refinancing rates on home loans below.