How often can you refinance a home loan?

Refinancing is the process of switching home loans, whether that’s by negotiating with your current lender or swapping to a new provider altogether.

Refinancing your home loan can be a good way for borrowers to save money over the life of their loan by accessing lower interest rates and better features.

But considering most mortgages in Australia last between 25 to 30 years, just how often should you refinance?

There are advantages and disadvantages to refinancing, and there are other ways to save money besides switching up your home loan. Here’s what you should know.

There aren’t any hard and fast rules on how often borrowers can refinance their home loan, but the cost of refinancing can be significant, so you’ll want to make sure it makes good financial sense.

You should also keep in mind that your credit score will be impacted when you apply to refinance, though this should only be temporary.

This is because when you refinance, you’re transferring to a new loan and the usual credit report inquiries will be carried out by the lender, resulting in a hard credit check.

For this reason, you want to avoid making too many refinancingrequests in a short period of time.

Mozo’s financial services specialist, Peter Marshall, says there are personal aspects to consider as well.

“One aspect that can be overlooked is the amount of your time and effort it can take to get everything ready so that you have the best chance of your loan application being approved,” he says.

“Lenders want to be sure they have checked all your documentation is in order, so you need to make sure you have given them everything they need and it presents a strong argument for your loan being approved.

“If you are only saving a small amount of money you should think about how long it will take to get your documents in order and whether those savings are worth the time you would be investing in your application,” says Marshall.

Generally speaking, you should consider refinancing your home loan when you find that your interest rate is no longer competitive. You can monitor this by checking what’s being offered by competing lenders and doing a search to compare home loans every 12 months or so.

Marshall says it’s also a good idea to keep an eye on any moves that the Reserve Bank of Australia (RBA) makes to the cash rate.

“If the RBA has been moving the cash rate more often it is usually worth checking the rate on your loan against the rates offered by other lenders more often, and if the RBA has been leaving the cash rate alone you probably don’t need to check your loan so often.

“Lenders can change rates by more or less than the RBA cash rate has moved, so you should make sure that the rate on your loan remains competitive,” says Marshall.

Here are a few reasons why you might want to refinance your home loan:

• To get a lower interest rate: It’s a good idea to consider refinancing if you find the home loan interest rate you are paying can be beaten by other lenders – and your current lender won’t cut your rate. A lower interest rate is likely to mean lower monthly repayments, and paying less interest overall.
• Access better features: Refinancing can get you access to helpful features your current lender may not offer, such as free extra repayments, an offset account or flexible repayment options.
• Shorten the length of your loan: Cutting back to a shorter loan term will mean you pay less interest overtime, so it’s a good reason to consider refinancing. You could also refinance to a longer loan term, but that will see you pay more in interest.
• Switching loan types: You may want to change your home loan from a variable to a fixed rate, or swap to a split rate home loan. You should avoid refinancing while on a fixed rate term, as breaking this before the agreed timeframe will result in fees. We have a guide on fixed vs variable home loans if you want to learn more.

Here are some of the disadvantages and drawbacks to consider before you refinance:

• Having an LVR above 80%: If you have a loan-to-value ratio (LVR) of 80% or more, you’ll need to pay lenders mortgage insurance (LMI) for a second time when you refinance. If your LVR is still above 80%, consider whether it makes good financial sense to switch mortgage providers.
• Paying fees: Another disadvantage is the cost of refinancing your home loan. You may need to pay a discharge fee when closing your current mortgage, and if you’re on a fixed rate home loan, then you’ll likely pay a penalty for breaking it early. Costs involved with taking out a new mortgage can include an application fee, a property valuation fee and mortgage registration fee.
• Lower credit score: Your credit score will be affected when you apply to refinance, though it should only be impacted temporarily.
• Extending your loan’s term: Cash out refinancing and debt consolidation can be good reasons to refinance. Though in some circumstances, doing so will extend the length of your home loan. By extending your loan’s term, you’re also likely to lengthen the amount of time you’ll be paying interest.

• Negotiate with your current lender: You may be able to come to an agreement with your current lender to change the terms of your home loan. Some lenders can also allow you to adjust the frequency of your home loan repayments.
• Home equity loans and lines of credit: These allow homeowners to borrow against their home’s equity without replacing their existing mortgage.
• Reverse mortgages: Senior homeowners (usually 60 and above) can access the equity in their home in the form of a loan paid out as a lump sum or a regular stream of cash, known as a reverse mortgage.
• Selling the property: If the cost of refinancing doesn’t make sense for you, you might consider selling and then purchasing a more affordable home.

Borrowers looking to refinance should keep a couple of things in mind when starting to compare home loans. Here’s what to consider:

• Credit score: A higher credit score can help you secure a better interest rate. Your credit score is generally affected by your history of borrowing and repayments.
• Home equity: The more home equity you have, the better your chances of qualifying for refinancing. Lenders often prefer borrowers who have at least 20% equity in their home. If you refinance with less than 20% equity or you take cash out, you could find yourself paying lenders mortgage insurance.
• Interest rates: Generally, it’s advantageous to refinance when interest rates are lower than your current mortgage rate. It can be helpful to take a look at your current home loan and then compare refinance home loans on offer.
• Lender’s policies: Some lenders may require that you wait a set period of time before refinancing.
• Existing debt: The amount of existing debt you currently hold is also a factor that banks will keep in consideration.