Q: I refinanced my home loan late in 2013 after the RBA dropped the cash rate to 2.5%. Even though it has been less than 18 months, I keep reading about lenders cutting their interest rates and the RBA just made another cut to the cash rate. Is it too soon to refinance again? How often should I refinance my home loan?
A: Gone are the days when people will get a home loan and stay with the same lender for the full 25 or 30 year loan term. In Australia, the average homeowner changes their loan every four to five years because people continually seek a better deal, which I think is a very good thing.
Over the last 18 months home buyers have been enjoying some of the lowest interest rates in our history! But just because the RBA cuts the cash rate doesn’t necessarily mean that you should refinance. There are lots of other factors to consider, including what lenders do with the cut.
There isn’t a one size fits all approach to how often you should refinance, but I think every borrower should be aware of the market and do regular home loan health checks every 12 months or so. Whether you then take the plunge to refinance should be based on these considerations.
Costs of refinancing
While refinancing is ultimately done to save you money over the long run, refinancing will usually cost you some money in the process. Make sure you understand all the costs involved so you can work out whether the amount saved in interest over time will be greater than the refinance cost.
Locked into a fixed rate
If you have a fixed rate home loan, breaking this agreement may add further costs, which can be hefty depending how far into your fixed term you are and the size of your loan.
Your interest rate
If you regularly see advertised interest rates more than 0.5% less than your current interest rate, it might be worth considering a change or at least asking your lender for a better rate.
Changing goals and needs
Over time your goals and needs change so it’s important to make sure your home loan is still right for you. Is it flexible enough and does it have the features you need, like an offset account to reduce your interest, or the option of an interest only home loan for your investment property? Planning a renovation or accessing some equity might also be reasons to refinance.
Before taking the plunge make sure you:
- Know what your current interest rate is;
- Work out your one, three and five year goals;
- Speak to your lender and find out what is the best rate they can offer you and what it will cost to exit your loan; and
- Do some research or get a second opinion from an accredited mortgage broker to find out what other lenders would offer you along with costs to switch.
Have you refinanced your home loan one or several times? Share your story in the comments below.
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