5 factors to consider before refinancing your loan

The tips were broken down by Tiimely Home’s lead broker Barbara Giamalis, who explained the benefits of refinancing.

“Although refinancing isn’t as robust as last year, many consumers are still pursuing it to secure the best rates. Individuals under financial pressure are actively seeking savings opportunities as borrowers anticipate potential interest rate cuts next year,” said Giamalis.

“People coming off fixed rates from two years ago are experiencing a significant jump from around 1.9 per cent to 6 per cent. As a result, many are looking to refinance to obtain a better rate than what they’ve been offered.”

Giamalis’ five tips for refinancing loans are:

1. Some people can’t refinance because they’re ‘mortgage prisoners’

“Sometimes a person can’t refinance as they’re mortgage prisoners because of their interest rate. Banks always buffer the rate, adding 3 per cent when doing a loan. That means, if you are applying for a loan with a rate of 6.14 per cent, the lender will need to assess your ability to service the loan with a rate of 9.14 per cent,” she said.

“For those coming off a fixed-rate mortgage, it’s crucial to shop around or talk to your bank. With higher interest rates, many people are finding themselves as mortgage prisoners, unable to refinance due to their incomes not servicing the higher rates. While rates were around 1.9 per cent two years ago, they have now increased to 6 per cent, making it challenging for many to refinance.

“Don’t feel disheartened, talk to an expert to explore options for improving your refinancing eligibility. With the stage 3 tax cuts in July, it’s a good time to understand how these changes might affect your ability to afford a better home loan rate. For some, these tax changes could unlock the door to refinancing, opening up opportunities for a better home loan deal.”

2. You could be liable for break costs if you refinance on a fixed rate

“I wouldn’t recommend a refinance if you’re on a fixed rate because it’s likely the fixed rate would be lower than the current interest rate. If you refinance when your current loan is on a fixed rate, it can affect rate costs as well as incur additional fees with penalties so it can be costly,” Giamalis said.

“If a person breaks a fixed rate early, they can be liable for payment in advance fees and penalty interest. For example, if someone has locked in a fixed rate at 6.9 per cent and the rate has dropped to 6 per cent, they may have to pay a huge break cost if they refinance to the lower rate. Another time you wouldn’t want to refinance is if you’re looking to sell soon because there’s no point.”

3. Work out your break-even point

Giamalis said: “There are government charges to discharge the mortgage and then register the mortgage, and the bank can charge a fee of around $300–$400. There’s got to be a good reason if you’re refinancing every three months because it will cost you about $600–$700 every time you refinance.

“On top of the standard fees, banks will also charge interest to date which people forget. If you get charged interest on the first of every month and refinance on the 15th, the bank will charge the 15 days interest in one payment. Figuring out your break-even point is important when you are thinking about refinancing. You want to know when your savings from your new loan outweigh the costs you paid to refinance.”

4. Cashback deals can be misleading

“In the last six to seven months, most banks have pulled out of the cashback offers but they still do negotiate rates. They’ve pulled out because they’ve lost so much money, with some banks giving $3,000–$4,000 for a refinance,” she said.

“Cashback offers aren’t a new trend as they tend to come and go over the years. I know people who will only want a bank with a cashback offer and then work out the savings on a cheaper interest rate, which could be $2,000 or more in the first year on a cheaper rate, and the person is happy to leave the cashback offer.

“People should research beyond the cashback offer, specifically how the interest rate will compare over time and how much of it will be absorbed by switching fees.”

5. If you refinance to a longer loan term, you could pay more interest

“If a person has had the loan for 10 years and refinance back to 30 years, they’ve got to remember that they start all over again. Generally, the first five years of a mortgage over 30 years is interest so they’re taking themselves backwards. My suggestion would be if they’re on a 20-year loan that fits within the bank’s terms, keep it within the 20 years. Otherwise, you’re getting charged another 10 years of interest,” Giamalis said.

“Although it may reduce the monthly repayments and it might provide some short-term relief, it will catch up with you. I avoid recommending this strategy to my customers as it is just sending them backwards.”

[Related: Fixed rate and refinancing trends brokers should expect in FY25]

Jack Campbell is the editor of Broker Daily. After graduating from the University of Wollongong in 2022, Jack began his journalistic career working on Broker Daily’s sister brand, HR Leader. In August 2023 he was made the news editor and worked alongside some talented journalists writing articles and recording podcasts.

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