What prompts a refinance?
People switch loans and/or lenders for a variety of reasons. While everyone’s different, the following are common themes you may recognise yourself in.
- Finding a loan with less interest, less fees or better features
- An increasing level of equity in your home that you’d like to access
- Changing life circumstances since you took out your original loan
- A desire to review your financial plans or where you invest your money
When should you refinance?
It’s possible to refinance a loan after as little as 6 months if you have an especially compelling reason, like a significantly better rate or a strong desire to change lenders.
However, refinancing comes with costs which impact the benefits of moving within such a short time.
As a general guide, 2 years can be a good timeframe. You'll have built up more equity (see below) and established a repayment history, both of which could put you in a better position.
When personal circumstances change
You might refinance based on your life stage or personal circumstances.
For example, being in prolonged steady employment could give you the level of comfort to reassess your loan. And if your salary has increased since you got your current home loan, it could mean you’re in a good position to look for a loan on new terms.
Relationship changes, having children or inheriting money can also affect your financial situation and influence the level of repayments you make on a loan.
When a fixed-rate term ends
Deciding whether it’s the right time to refinance often comes down to the costs associated with getting out of your existing loan.
If you refinance a fixed-rate loan, for example, you could be up for break costs and these need to be factored into the financial implications of moving. Working out your break costs is worthwhile because you could still come out ahead when you take overall rate savings into account.
On the flipside, the end of your fixed-rate period can be the ideal time to reassess your loan and switch to an even better deal on another loan without any negative consequences.
As your equity increases
In some cases, refinancing sooner can result in greater savings. But if you’re not in a strong financial position you might gain more by waiting.
Many choose to refinance when they’ve built up 20 percent or more equity and have a lower Loan to Value Ratio (LVR) as a result. LVR is the amount of your loan, as a percentage of the value of your property, and a lower one can lead to a better deal.
Not sure how to work out your equity? Getting a current valuation can give you the insight you need and from there you can calculate your equity by dividing your current loan balance by your home’s market value.
When your credit rating and repayment history are strong
Having a solid track record on repayments with your existing lender can put you in a great position to consider a refinance.
However, refinancing can also temporarily lower your credit rating while credit checks are being made or you’re closing an existing loan. Fortunately, this is usually only a temporary effect.
When you want to make a values-based choice
When it comes to refinancing there’s really no need to wait and wonder.
Monitoring your home loan every two years or so and being proactive when you see a good deal – or a lender you’d rather do business with – can be a great strategy.