Should You Refinance? The Pros and Cons

Refinancing the loan on your property can seem like a no-brainer. Lower interest rates could mean saving money on your monthly home loan repayments. It’s important to carefully consider your current situation to ensure that refinancing won’t lead to unexpected costs in the future. Here are just a couple of things to consider when deciding whether to refinance.

Pro: Potentially lower monthly repayments

The primary benefit of refinancing is the potential to lower your monthly mortgage repayments. Switching to a lower interest rate could save you time and money on your home loan. Talking to a mortgage broker about your refinance options may lead to a more competitive rate, however…

Con: Refinancing typically involves additional costs

Refinancing from a fixed-rate home loan means essentially closing out your existing loan and opening a brand-new one. Refinancing before the fixed period of your home loan ends may incur a break cost. Be sure to touch base with your broker as they can inform you of these additional charges before you decide.

You may have to pay costs to establish a new loan, such as establishment fees, valuation fees, and settlement fees. Consulting a Mortgage Broker can help ensure the long-term savings are worth the additional upfront costs.

Pro: Switch between fixed and variable rates

Refinancing can also give you the flexibility to switch between a fixed and variable rate. A fixed-rate home loan locks in your mortgage repayments at a set rate for a specific period, protecting you from interest rate increases. However, you won’t benefit if rates drop. With a variable rate, your repayments fluctuate with market conditions, meaning they can either rise or fall.
For example, if you’re on a fixed rate and interest rates begin to drop, you may want to refinance to a variable home loan to take advantage of the lower rates. Alternatively, if you have a variable-rate loan and interest rates are expected to rise, switching to a fixed-rate loan could help protect you from increasing repayments.

Con: You risk doubling up on Lender’s Mortgage Insurance

If you didn’t meet the 20% Deposit on a home loan, you may have paid for Lenders Mortgage Insurance. If you paid LMI on your initial home loan, it won’t be respected if you refinance with a different lender, meaning you’ll have to pay LMI on the refinanced loan if you can’t cover 20%.

Also, if you were able to skip LMI as part of the First Home Guarantee Scheme, you’ll now have to cover it. Unless you can cover the cost of a deposit upfront, you’ll have to include LMI in your transfer costs. This can be dependent on several factors, including the state of your existing loan, as well as if the value of your property has increased. This is one of many reasons it’s important to check with a mortgage broker before moving forward with refinancing.

Pro: Access equity from your home loan

If you’ve owned a property in Australia for several years, and you have paid of a significant amount of the loan its value may have increased, meaning you’ve built up equity. Equity is the difference between your property’s current market value and what you still owe on your home loan. For example if you owe $300,000 on your home loan, and your property is valued at $900,000, your equity would be $600,000.

When refinancing, a lender may allow you to withdraw equity from your property, and that equity can be used for several purposes, such as renovations, cars, or even another property. When refinancing, having substantial equity can make you a safer, more appealing borrower, which can help broaden your refinance options.

There’s a lot to weigh up when it comes to refinancing your home loan, but it’s not something you need to do alone. Contact your local MoneyQuest mortgage broker to see if refinancing will save you money.

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