The interest rate you may be offered as a new home loan customer could be significantly different from one you’re offered as a refinancer. After several years of paying off your existing loan, it’s likely you may be in a more advantageous financial position to nab a more competitive rate and home loan product.
However, there are some common traps that refinancers can easily fall into if they’re not careful if they’re only focusing on refinance rates.
Let’s explore everything you need to know about Australian home loan refinance rates, including tips and tricks to ensure you switch to the best option for your needs and budget.
What are refinance rates?
Refinancing a home loan is when a borrower switches to a new home loan and/or new lender. You may choose to make an internal refinance, and switch home loans with your current bank or lender, or an external refinance, and switch lenders completely.
Some of the most popular goals to refinancing in Australia include:
- To nab a lower interest rate
- To pay fewer ongoing fees
- To add features to your home loan
- To access the equity in your property
- To switch to a preferred lender, such as one that offers branch access
A refinance rate is another way to describe the mortgage rate offered on a home loan used for refinancing purposes. It is no different to a standard mortgage rate, in that it is the rate charged on your principal owing. However, oftentimes home loan refinance rates can be more competitive for customers looking to make the switch.
Why are refinancers offered better rates?
There are two reasons that refinancers may be offered better interest rates than first home buyers when they switch mortgages:
- Lenders may offer lower rates to all new customers to entice them on to their books; and
- The refinancer now qualifies for more competitive home loans.
Generally speaking, lenders may offer lower rates to new customers as a way to entice new borrowers onto their books. This is true for both first home buyers and refinancers. Chances are, if you’ve had a home loan with one lender for some time, that lender may now be offering lower rates for new customers. This isn’t always true in a rising rate environment if you fixed when rates were lower, but could be the case for many variable rate home loan customers.
This is why it is recommended that you regularly review the home loan market to ensure you’re still getting the best mortgage rate for your specific needs and situation.
Further, when you first applied for your home loan, you could have been in a worse-off financial position. It’s likely you spent much of your savings just to get a foot on the property ladder, and/or you may have applied with a small deposit. Since you first applied, your income or your credit score may have increased. Most significantly, after years of paying down your principal owing, you may have also increased the equity in your home.
These factors may mean that you are now in a position to qualify for more competitive home loans, as your financial situation has improved. For example, if you’ve paid off enough equity that your loan-to-value ratio (LVR) is now below 80%, or even below 60%, a lender may be more likely to offer you its lowest interest rates.
If your LVR is 80% or lower, you may be able to qualify for one of Reduce Home Loans most competitive offerings. Our Economizer Variable 80 Home Loan is available to refinancers with LVRs of at least 80%.
What are the benefits of refinancing?
The refinancing process provides a range of benefits to customers, depending on your switching goals.
Nab a lower rate
As mentioned above, you may now qualify for a lender’s more competitive interest rates than when you first signed up. If interest rates are on the rise, or you’re just looking to reduce your monthly repayments, switching to a lower interest rate is one option available to achieve this. You may even be able to access generous cashback offers that some lenders provide to refinancers, which could help to sweeten the deal.
Reduce your fees
Another benefit of a new home loan is that it may come with fewer fees than your current mortgage. If your ongoing mortgage fees are starting to eat away at your budget, you may want to consider switching to a loan option which charges you less.
Add features to your home loan
When you first applied for your mortgage, you may not have been in the financial position to go for a loan option with all the bells and whistles. If you’re on a basic, no-frills home loan, you may want to refinance to gain access to helpful features, such as making additional repayments, an offset account or a redraw facility. Keep in mind that some lenders may charge higher rates and fees for the benefit of using these features.
Access equity in your property
If you’ve built up a considerable amount of equity in your property, and are in need of some cash, you may be able to refinance to access some of this equity. This process generally involves increasing your loan amount when you refinance and paying you out the difference. Oftentimes, homeowners will consider this option to help pay for home renovations, as the improvements made to the home may work to boost the property value, and increase your equity again – essentially pay for itself. You may even choose to access equity to help pay for the deposit for an investment property.
Switch to a preferred bank or lender
Some customers may be seeking to refinance to switch to a bank or lender they prefer. This may be because a different lender offers greater customer service, more innovative features and fintech, or makes more ethical investment choices. Whatever the reason, you may choose to refinance to be with a lender that better suits your needs.
What else should you consider when refinancing?
Keep in mind that the interest rate you may be offered will depend on several factors, including your credit history, your income, your length of employment, and the equity in your home.
You will need to meet the lending criteria of the new lender when you apply to refinance. If your financial situation has digressed, such as you’ve taken on additional debt (car loans, maxed-out credit cards etc.), or you’ve seen your income decrease, you may not be in the best position to consider switching mortgages.
In a rising rate environment, property prices can fall in tandem, which could reduce the equity in a home. Be sure to thoroughly assess your financial health, as well as the equity in your home, before considering refinancing, as you may need to pay lender’s mortgage insurance (LMI) if your LVR is above 80%. The last thing you want is to find yourself in negative equity, where the value of your home is less than your mortgage owing. In this instance it may be near impossible to refinance until you’ve chipped away at your principal owing
This is colloquially referred to as being in ‘mortgage prison’, and can be a very challenging position to find yourself in. If you’re struggling to meet your home loan repayments, but cannot refinance, it may be worth speaking to your current lender about hardship support.
Refinancing can also cost you in both time and money. There are some costs associated with switching, including upfront fees, such as loan application fees for the new lender, property valuation fees if you’re paying for an independent assessment, exit fees like break costs if you’re exiting a fixed rate home loan term early, and settlement fees with your current lender. Canstar research suggests refinancing can cost between $75 – $807, with the top end of the scale costing some customers $2,108.
Additionally, it can take several weeks to finalise a home loan refinance. This process can involve locating personal identification documentation, submitting applications, and waiting for a settlement period to end.
That being said, the savings you may make on a more competitive home loan could help cover the cost of switching. For example, if it costs you a few hundred dollars to refinance, but you make this back in interest rate savings over a year, you may decide the time and money spent was worth it.
Refinancing a home loan may be a worthwhile opportunity for some eligible customers to achieve their goals, whether that includes reducing their expenses with a lower-rate home loan, or gaining access to helpful loan features.
Any statements are general in nature and do not take into account your financial personal situation, objectives or needs. You should consider whether any statement/s is suitable for you and your personal circumstances. Before making any financial decision, consider your circumstances and the product disclosure statement.