10 Things You Must Know Before You Refinance Your Mortgage

Refinancing seems like an excellent choice for many Australians. While refinancing can help save money over time, this is not always the case. There are several factors to consider before taking this path, as well as common mistakes borrowers can make when refinancing.

1. A Lower Interest Rate Isn't Everything

Many Australians believe that securing a lower interest rate is the main reason to refinance, moving quickly whenever a lender presents a lower rate.

However, lower interest rates can come with hidden costs. A loan might entail additional fees, or a low introductory rate may revert to a higher rate once the initial period ends. It is important to look at the full picture, understand the associated costs, and know whether an offer is a lifetime discount or a temporary one.

2. Research Is Important

The lending market is highly competitive. Taking the time to shop around, or working with a mortgage broker, can uncover many options, though some are more suitable than others. Still, there is a difference between researching and formally applying.

As a rule of thumb, avoid submitting numerous loan applications, as this can harm your credit rating. Research involves understanding what the market offers before making a rushed decision.

3. Not All Lenders Are Reliable

Some smaller and private lenders offer attractive low interest rates. While some work out well, others may come with poor customer service and limited support when needed. Even if a lender advertises affordable rates and attractive terms, poor service reliability is a good reason to exercise caution.

4. Look for Lenders Offering Financial Rebates

Some lenders provide cashback or refinancing rebates to attract new borrowers. These offers can help cover switching costs.

Rebates often range from $1,000 to $2,000 or more. While appealing, they should be evaluated carefully. If the overall offer stacks up, a rebate can be a bonus, but lower interest rates without a rebate may save more money over the life of the loan.

5. Always Calculate the Breakeven Point

To determine whether refinancing is worthwhile, always calculate the breakeven point. For instance, if refinancing costs total $6,000 and the monthly saving is $100, dividing $6,000 by $100 gives 60 months (five years) to break even.

This may not be an issue if there are plans to remain in the home for that length of time. Conversely, if switching costs are $1,000 and the monthly saving is $200, the breakeven point is just five months. Seeking options that break even quickly allows savings to be realised sooner.

6. You Should Assess the Length of the Loan

When evaluating refinancing offers, many homeowners focus solely on the interest rate. However, securing a lower rate by resetting to a new 30-year term extends the lifespan of the loan.

A longer loan term lowers monthly repayments, but it also increases the total interest paid over time. It is often worth considering a new loan term similar to the remaining time on the existing mortgage. If the budget is tight, extending back to 30 years remains an option, provided the long-term cost is clear upfront.

7. Don't Underestimate the Cancellation Costs

For fixed-rate mortgages, break fees can be significant, ranging from nothing at all to thousands of dollars. Anyone considering refinancing a fixed-rate loan should request a fixed-rate break quote from their lender, including any early repayment costs.

Comparing these exit costs against the savings of a new loan helps in making an informed decision.

8. Don't Wait Until Struggling to Meet Repayments

It is best to refinance while in a stable financial position. A strong credit history and a clean repayment record increase the chances of securing competitive loan terms.

Refinancing during financial hardship is less likely to yield favourable terms. However, if restructuring a loan helps restore financial stability, it can be a useful step, with the option to review the mortgage again once circumstances improve.

9. Determine the Real Value of Your Home

Overestimating home value is a common mistake. Obtaining an accurate, current valuation before refinancing is essential, rather than relying on outdated figures. A valuation from a few years ago may no longer reflect current market value.

If equity in the property is insufficient, refinancing offers may be less favourable than anticipated. Mortgage brokers can often access property valuations, making it helpful to assess property value prior to applying.

10. Decide on Short vs. Long Term Loans

Refinancing creates an entirely new loan to pay off the existing one, allowing borrowers to adjust their repayment timeline to suit their budget.

Many choose longer terms to keep monthly payments lower, but shorter terms mean paying less total interest. For those with 25 years remaining on a mortgage, keeping the new term aligned with the remaining period avoids adding unnecessary years of interest, unless budget constraints require a longer term.

Final Thoughts

Refinancing carries both advantages and drawbacks. Analysing each aspect carefully allows borrowers to make a well-considered choice that supports long-term financial security.