When to Refinance your Home Loan

Refinancing your home loan can be a smart financial move if you want to save money. However, it's important to know when to refinance and how to do it right. At Tiimely Home, we want to help you make an informed decision about refinancing so you can switch when it makes financial sense. In this guide, we'll take you through the key considerations to help you decide when to refinance your home loan.

Refinancing a home loan involves taking out a new loan to pay an existing loan. There’s a bunch of ways to refinance and each come with different benefits.

And right now, more Australians are refinancing than ever before. The latest ABS stats show that an all-time high of $19.9 billion worth of loans were refinanced in February 2023. This comes off the back of approximately 800,000 fixed-rate home loans due to expire this year, competitive cashback deals from lenders, and consecutive cash-rate increases that have impacted household expenditure.

Clearly, it’s worth scoping out when you should consider refinancing, which type of refinancing is right for you, and how long it’s going to take you to recoup the costs of refinancing. So, let’s run you through what you need to know about when to refinance

When your interest rate is higher than what’s in market

One of the main reasons to refinance your home loan is to take advantage of lower interest rates. If interest rates have moved since you took out your original loan (or the last time you refinanced), refinancing can help you save money on your monthly repayments. Check out Tiimely Own's current interest rates and use our refinance calculator to see how much you could save.

Your financial situation has changed

If your financial situation has improved since you took out your original loan, refinancing can help you access better loan terms and lower interest rates. For example, if you've had a pay rise you could consider a cash-in refinance.

Similarly, if you’ve paid off a large portion of your home loan, you could check to see if you’re eligible for a better rate based on your LVR. Some lenders have different interest rates depending on your LVR. Generally, the lower your LVR, the lower your rate.

Take this example: let’s say you refinance with a 70% LVR. You could score a variable rate that’s 0.51% better than a 90% LVR loan, depending on the lender and their LVR-tiers.

In practical terms, if you’re paying off a $400,000 mortgage over 25 years, you’d be saving up to $107 per month in repayments (or up to $32,000 over the life of your loan). That’s a good reason to shop around, right?

On the other hand, if your financial situation has deteriorated, refinancing may not be a good option right now. Keep on top of your repayments and revisit refinancing again when you feel like you’ve made some inroads.

Using refinancing to get rid of Lender's Mortgage Insurance

Did you get hit by Lender’s Mortgage Insurance (LMI) when you first took out your loan? If that’s the case, you may be able to use refinancing with your current lender to receive a partial refund on LMI from your insurance provider.

Need a refresher on LMI? If you need to borrow more than 80% of your property’s value, lenders will charge you a thing called LMI (a one-off cost that protects the bank in case you’re unable to repay your loan). Generally speaking, the more you borrow, the higher your LMI premium.

But let’s get back to how refinancing can help you recoup some of your LMI costs. In some cases, your insurance provider may offer to refund up to 40% of your LMI premium if you pay back the loan within the first year (or 20% if it's repaid within the first one to two years).

After two years have passed, typically no refund is offered. So, if you manage to pay down your mortgage on time and opt to refinance with the same lender, you can use this partial refund to help pay for the costs of refinancing – all lenders and insurance providers operate differently, so be sure to check before you proceed.

You want to change loan features

Refinancing can also help you change loan features to better suit your financial goals. For example, if you want to switch from a variable rate loan to a fixed rate loan, or vice versa, refinancing can help you do that. If your fixed term hasn’t expired yet, ensure you understand what the break fees are (they can be very high) before you decide to go ahead with your refinance.

You can also refinance to access features like offset accounts or redraw facilities that may not have been available on your original loan.

Your loan has high fees or charges

If your current loan has high fees or charges, refinancing can help you reduce or eliminate these costs. Some common fees to watch out for include application fees, ongoing fees, monthly account management fees, packaging fees (if you’ve bundled your loan with credit cards and or other financial products), and early repayment fees. Be sure to factor in any costs associated with refinancing, such as discharge fees or new application fees, when deciding whether to refinance.

Tiimely Own doesn’t charge any application fees. Our only ongoing fee is if you need an offset account, and that’s only $10/mth.

Cash-out vs rate-and-term

The most common type of refinancing is a rate-and-term refinance. In a nutshell, it’s designed to change your interest rate and/or the term of your loan, while keeping your loan amount the same (well, except for the extra cost to cover refinancing).

On the flip side, a cash-out refinance is done when you want to borrow a bit extra on top of your existing loan. Typically, this means converting some of your home’s equity to increase your loan’s principal amount. You can put your equity towards things like renovations, repairs, or landscaping.

Refinancing can come at a cost

Depending on who you refinance with, and what you’re trying to achieve you could come across some upfront and ongoing fees to switch. Here’s how you can run the numbers and figure out which type of refinancing is right for you.

How long does it take to recoup the costs of refinancing?

Before you run off to refinance, remember this: refinancing can come with extra upfront costs.

How much you have to pay depends on a number of factors, such as whether you stick with the same lender or take your loan to a different provider.

You may even receive a cashback promotion from another lender and whilst some upfront money in your pocket looks attractive, be sure that it actually leaves you better off. Some initial cash flow may not actually offset the costs over the life of your new loan. So it’s always good to check the nitty gritty details of ongoing fees and financial products.

Working out the breakeven point

So before you get started, it’s worth crunching the numbers to figure out when you’ll break even (a.k.a. when the amount you’re saving outweighs how much it cost you to refinance).

To work out this ‘break even point’, you need to:

• Step one: add up all the costs of refinancing (including the cost of closing the old loan as well as opening your new one).
• Step two: calculate how many months it’ll take for you to break even. Try dividing your total refinancing costs by your monthly savings.
  Take this example: let’s say it costs you $3,000 to refinance and you’ll be saving $100 a month on this new loan. That means it’ll take you 30 months (or 2.5 years) to reach your break-even point.

When it comes to deciding how to refinance and when refinancing makes sense, it all depends on your current situation and goals. Your best bet is to assess your options and check if there are more competitive loan options available.

Being proactive about refinancing can save you thousands of dollars and switching is usually easier than you think. So, figure out what type of refinancing is right for you and how much it’ll cost you to decide when is the right time to make your next move. At Tiimely Home, we offer a range of refinance options to help you achieve your financial goals. Check out our refinance calculator or contact us today to learn more.