While it feels like a major hassle, the fact remains that refinancing your home loan is often the only way to get a good deal.
According to digital mortgage broker Finspo, the average home loan duration is surprisingly short at 4-5 years. It’s not that people are powering through their mortgage and paying it off super-fast. Rather, people often refinance their mortgage to get a better deal.
Refinancing was no doubt driven by the property boom and record low interest rates in 2021. This year, people are seeking to lock in a lower starting rate in anticipation of future interest rate rises.
“Savvy Aussies are taking action on their home loans as this is often where they can have the biggest impact on their savings,” says Angus Gilfillan, CEO and co-founder of Finspo.
Gilfillan says that the most common reasons people refinance include when there are lower interest rates available, your property has increased in value, or your fixed rate is due to expire.
Refinancing is also a useful way to unlock the existing equity in your home to fund an investment property purchase or renovation on your existing property. Another reason is simply a change in circumstances, so you might be looking to extend your mortgage terms or take advantage of a cashback offer.
Beware the ‘loyalty tax’
The days where being a long-term bank customer afforded you savings are well and truly gone. In fact, these days the opposite is generally true.
The simple fact of the matter is that you often need to leave your existing home loan provider to get a competitive deal.
“Australians are becoming increasingly aware of the ‘loyalty tax‘,” explains Gilfillan. “Which is the extra interest paid by existing home loan customers compared to new customers that’s costing many Aussies thousands every year.”
You’ll know this if you’ve ever checked the introductory interest rates on offer. They are almost always lower than the average rate being paid by existing customers.
The loyalty ‘tax’ isn’t really a tax, but rather a premium paid by existing customers. Banks offer big discounts to attract new customers, something you’re missing out on if you remain ‘loyal’ out of complacency.
It’s true that it’s not easy to switch home loans, something lenders rely on to keep you on board at a higher rate. Sometimes all it takes to improve your mortgage rate is to call your existing lender and ask them for the rate they are currently advertising for new customers. They might not go quite as low, but they will almost certainly knock some points off your current interest rate.
Then you can head out to find an even better introductory deal with someone else.
Tips for refinancing your home loan
Understand your current situation
Know exactly where your current mortgage stands so you can compare it with what’s on offer in the market.
- What type of loan do you have – fixed, variable or split?
- What is the current balance?
- How long are the terms?
- What is your interest rate?
- Are there other fees or other charges that you pay?
- What is your property currently valued at?
Clean up your finances
Refinancing with a new provider means you’ll need to pass all the relevant credit score and repayment history checks. Just because you’ve been approved for a loan before, doesn’t mean you’ll pass muster again, especially with tighter lending restrictions in place.
To avoid being slugged with mortgage insurance, check that you’ll have more than 20 per cent equity in your home when you refinance. Pay off as much debt as you can and ensure all your bills are paid on time. Consider your current debt-to-loan ratio and whether it can be improved – now is the time to ask for a pay rise.
Basically, you want to prove to a new lender that you’re a consistent, low-risk prospect.
Compare across all kinds of lenders
“Cast your net wide,” says Gilfillan. “There are thousands of home loan products on the market, so it can often be worth going beyond just your current lender to compare and make sure you get the best deal.”
There are plenty of loan comparison sites that will help you compare across all lenders, including the Big 4 banks, smaller banks and other financial lenders. A few to start with include:
Consider using a mortgage broker
Gilfillan recommends using a mortgage broker. “When it comes to home loans, comparing “apples with apples” can be tricky, so it helps to have an expert on your side,” he says. “I would suggest using a broker who can not only compare rates, but can consider fees, cashback offers, switching costs, lender pros and cons, timing, etc.”
As a broker, he has to say that, though his advice is sound. It can be daunting doing the loan comparison work yourself, so talking to a broker can simplify things. They’ll also tailor the search exactly to your needs.
You can find a licensed mortgage broker through:
- a professional association like MFAA or FBAA
- asking your lender or financial institution
- getting recommendations from family and friends
Factor in all costs
There may be costs involved with switching lenders, so make sure you factor those into your calculations. Consider exit and establishment fees and other lending charges, as well as cashback offers.
Always ask for less
Always remember the basics of negotiating: if you don’t ask, you won’t get. Refinancing your loan is no different. Don’t accept an advertised rate as being the lowest a lender will go. Ask for less and you might be pleasantly surprised to get it.