Q: I took out my mortgage at the start of 2014. It’s a variable-rate loan and I’ve been happy with the RBA’s interest rate cuts. But I’ve seen some really low rates advertised – is it too soon to look at refinancing?
A: Aussie borrowers have become very savvy, and very value-conscious; the days when people would take out a loan and stay with the lender for the full term are long gone. Most homeowners now change their loan every four or five years, because they’re looking for a better deal.
In the last few years we’ve been enjoying some of the lowest interest rates in Australia’s history, but that doesn’t automatically mean you should refinance your mortgage, and there’s no one approach that best suits every situation.
That said, I think every homeowner should keep their eye on the market and run the ruler over their loan every year or two. There are a couple of key considerations to keep in mind:
Up-front costs vs long-term savings
Refinancing is only worth doing if it saves you money over the long term, but there will most likely be some up-front costs. Make sure you’re clear on what those costs will be so you can be certain that the amount you’ll save in interest will be more than the cost of making the change.
Fixed-rate loans are usually more expensive to change than variable rate loans. The cost depends on how far into the fixed term you are, but they can be considerable. Check with your mortgage broker or home loan provider to get clear on what the costs (if any) will be.
As a simple rule of thumb, if you regularly see rates advertised that are more than 0.5% less than your current rate, you should think seriously about making a change, or ask your current lender for a better rate.
Your goals and plans
Your situation in life is always changing so it’s worth checking to make sure your mortgage matches your needs. There are lots of different loans on the market with lots of different features, like offset accounts, redraw facilities or even interest-only loans for your investment property.
You might also want to consider unlocking some of the equity you’ve already accumulated in your home to pay for renovations, school fees, a major purchase (like a boat or a car) or even a family holiday.
Whatever your reasons, make sure that before you do anything you’re clear on:
- Your current interest rate
- Your financial goals over the short, medium and long term
- What rates your current lender can offer, and what it’ll cost to exit your current loan
- What other lenders can offer you, and any other costs involved with switching home loans.
You can find more information in Aussie’s free Home Loan Refinancing Guide, or contact a mortgage broker if you need more detailed information.
Have you refinanced recently, or are you considering refinancing? Let us know what you’re thinking in the comments below.