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Author: Richard Whitten | finder.com.au

Is there a right time to refinance?

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Right now, home loan interest rates have never been lower. This is true for both fixed and variable rate loans. There are competitive offers across the market for borrowers looking for their first home loan.

This means if you already have a home loan you might not currently be getting the best deal. Refinancing, which means switching to a new home loan, could save you thousands of dollars by giving you access to a lower interest rate and lower repayments.

It sounds like a no-brainer, right? For most borrowers now is probably a fantastic time to switch. But your personal financial circumstances and future plans matter too.

Let's break down some key reasons why now is a good time to refinance, and why for some borrowers it might pay to stay with your current lender instead.

Why is now such a good time to refinance?

The Reserve Bank of Australia (RBA) sets the official cash rate every month, which has a strong effect on banks' costs to borrow money. This is the money they use, in part, to fund variable rate home loans.

So when the cash rate drops, variable home loan rates generally drop too. And the RBA has cut the rate five times since June 2019. This is why interest rates have never been lower. A year ago a competitive rate started with a 3. Now it's a low 2%.

And when you're borrowing the sort of money required to buy a house in Australia, even a slightly lower interest rate really makes a difference. Here's a quick example.

Let's say you borrow $400,000 over 30 years with an interest rate of 3.00%. Your monthly repayments would be $1,686.

Now if you kept everything else the same but dropped the interest rate to 2.70% your repayments would fall to $1,622 a month. That's a difference of $64 a month or $768 a year.

And over the life of a 30-year loan? That $23,040.

Refinancing to a lower rate makes good financial sense for most borrowers.

Are there reasons why you shouldn't refinance?

Not everyone should refinance. And in some cases, it can actually be a costly mistake or just a waste of time. Here are some situations where you're better off staying with your current home loan.

You are currently on a pretty good deal

If your current home loan rate is competitive relative to the market's lowest offers then switching probably isn't worth it. Especially if there's only a small difference between your rate and the next best offer.

Always crunch the numbers and compare for yourself.

You're on a fixed-rate loan and the break costs are high

Borrowers who refinance a fixed rate home loan before the fixed period ends have to pay a fixed rate break cost. This cost varies depending on multiple factors including the length of the fixed period, how far into the loan you are and how much you've borrowed.

In some cases breaking a fixed-rate loan can cost several thousand dollars in break fees. This could offset any savings gained by a lower rate. Ask your lender to estimate your break costs. For most borrowers, it might be best to wait until the fixed period on your loan ends. Once it reverts to a variable rate it's much easier to switch. | Richard Whitten, finder.com.au

You don't have much equity

Let's say you bought your home two years ago with a 10% deposit. You had to pay a lenders mortgage insurance (LMI) premium because your deposit was under 20%. Now you want to refinance but your equity (the amount of the property you own minus your debt) is still under 20%.

In this scenario, you'd get hit with LMI a second time. This makes refinancing too expensive to be worth it. You're better off making repayments on your loan principal until you own more than 20% of the property's value.

You've just started the home loan or you're about to end it soon

If you've just started the loan or are close to paying it off, the effort and cost of refinancing might not be worth it. Even if your old loan doesn't have discharge fees and the new loan has no upfront fees there are still costs involved, such as mortgage registration fees.

Your finances are in worse shape now than they were when you bought your property

Refinancing requires a new home loan application and your new lender will examine your spending, income and employment history just like your old one did.

If you've turned into a big spender recently or your income has reduced significantly then you might not be able to refinance. Your prospective lender might knock back your application if it’s not satisfied you can meet your repayments.

In any of these situations, you may be better off waiting to refinance at a better time or simply staying on your current loan.

Richard Whitten is a senior home loans writer at Finder

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