How Often Should You Refinance Your Home Loan?
With most home loans spanning 25-30 years, it would be such a huge commitment to see out the duration of your original mortgage. The good thing is you have the freedom to refinance to a cheaper or more flexible product whenever you like.
There are no set rules for how often you should shop around for a new home loan, but a good rule of thumb is at least every 2 years. With so many options available on the market, the interest rates and fees are very competitive, so why not take advantage and save some cash in the process?
The main reasons for refinancing are to save money by paying a lower interest rate, to reduce the length of the mortgage and to access features such as an offset account or redraw facility but there are additional factors to consider before jumping into refinancing:
- Be wary of the length of the new loan. You’ve found the perfect home loan with a lower interest rate and more features than your current loan, so what’s the catch? Some lenders will only offer to refinance with a new loan of a 25 or 30-year term. This is all well and good if your current remaining term is close to 25-30 years, but if you have less than 20 years left to go, refinancing with a longer term isn’t going to be the greatest option. A longer term means more interest payments, resulting in a higher cost. Negotiate a term similar to what you currently have remaining.
- If you have less than 20% equity in your home, you’ll probably need to pay lender’s mortgage insurance (LMI). LMI is a non-refundable, one-time premium paid at the settlement of your mortgage and is not transferrable, so it will need to be paid again on any new loan if equity is less than 20%. If you avoided LMI on your mortgage and your home equity happens to drop below 20%, then staying with your current lender will likely be the best option as LMI can cost thousands of dollars. Equity can drop due to factors such as the condition of your home, your neighbourhood desirability and market trends.
- Is your current rate fixed or variable? If your interest rate is currently fixed, it may not be worth refinancing until the fixed term ends. Breaking a fixed term often attracts fees that will outweigh the financial benefits of refinancing.
It’s a great idea to shop around for a better home loan, but always do your research when looking to refinance to ensure that changing lenders is a financially viable option for your circumstances.