In this reel, Marty put it simply: refinancing can be powerful, but it’s not always the right move. If you don’t properly understand a few things first, you could end up worse off over the long term. Below we’ve set out some of the general points we think every borrower should weigh up before switching loans. For Marty’s own take, have a watch of the video.
A lower rate isn’t the whole story
A sharper interest rate is usually what gets people thinking about refinancing, and it can make a real difference. But the rate is only one part of the cost of a loan. Before you move, it’s worth looking at:
- Switching costs. Leaving one lender and setting up with another can involve discharge, establishment, valuation and government registration costs. These vary between lenders and states, so get them in writing.
- Fixed-rate break costs. If you’re part-way through a fixed term, breaking it early can trigger a break cost. Depending on how rates have moved, this can be significant. Ask your current lender for an estimate first.
- The comparison rate. The comparison rate is designed to show more of the overall cost of a loan than the headline rate. It’s a useful starting point, but it won’t capture everything about your situation.
Watch out for resetting the clock
Here’s one that catches a lot of people out. Say you’re 7 years into a 30-year loan and you refinance into a new 30-year loan. Your repayments may drop, but you’ve added years back onto your debt. Over the life of the loan, that can mean paying more interest overall, even at a lower rate.
There are ways to manage this. You can choose a shorter loan term, or keep your repayments at their current level so the extra goes straight to the principal. We’re always happy to model the options with you.
Will you still qualify?
Refinancing means a new credit assessment. Lenders apply their own serviceability tests, which generally include a buffer above the actual interest rate, in line with APRA guidance. If your income, expenses or debts have changed since you first borrowed, or property values have moved, you might find you can’t borrow the same amount, or can’t get the terms you expected.
Lenders also look at your loan-to-value ratio (LVR). If your LVR is above 80%, lenders’ mortgage insurance may apply with the new lender, even if you already paid it with your current one.
Cashback offers and features
Cashback offers can be tempting, but they shouldn’t drive the decision on their own. Weigh any incentive against the long-term rate, the fees and the features you’d be giving up or gaining, such as an offset account, redraw, or the ability to make extra repayments. A feature you’ll actually use may be worth more than a one-off payment.
Debt consolidation: handle with care
Rolling credit cards or car loans into your mortgage can lower your monthly repayments. But stretching short-term debt over 25 or 30 years can mean paying much more interest overall, unless you make extra repayments to clear that portion faster.
Questions we suggest asking before you switch
- What will it cost me to leave my current loan, and to set up the new one?
- Will my loan term reset, and what does that do to the total interest I’ll pay?
- Am I in a fixed period, and what would the break cost be?
- Will I need to pay lenders’ mortgage insurance again?
- Which features do I need, and which am I paying for but not using?
- Has my current lender offered me a better rate if I stay?
How we can help
Every situation is different, and that’s why we don’t believe in a one-size-fits-all answer. Sometimes refinancing is clearly worth it. Sometimes a conversation with your current lender gets you most of the way there. And sometimes staying put is the better choice. Our job is to help you understand the trade-offs so you can make an informed decision.
This is general information only and does not take into account your objectives, financial situation or needs. Speak to a broker before acting.