Ask an Adviser: What to consider when refinancing your home loan

With interest rates rising, many Australians are revisiting their mortgage options. Here, we talk to Apt Wealth Home Loans Broker Matthew Baker about what to consider when it comes to refinancing.  

Matthew Baker:  For most of us, a mortgage is the biggest debt we will ever have, and it’s important to revisit it regularly. Regardless of the interest rate environment, it’s a good idea to review your mortgage every few years to ensure you have the right product for your current circumstances. That could be about interest rate and costs and/or the features you need to support your life stage.

It is a competitive space for lenders, so despite the current economic climate, there may be a better deal to be had.

So, when and why should you refinance?

It’s worth looking at your options any time you feel your loan isn’t working for your lifestyle, particularly if there has been a major change, such as a new arrival, a significant change in income or a change in life goals and direction.

Of course, the specific advantages of refinancing will be different for every borrower, but it can be used to reduce your rate, give you more certainty over repayments, add or reduce features to align with your life stage, access home equity or consolidate debts.

The first step is always to look at where you are currently at, your life priorities and financial goals, and review these against your current loan product. Speaking to a broker to review this won’t cost you anything, but it could save you thousands of dollars.

It’s not just about switching lenders; there may be a better deal with your current lender, and a broker can help you access this.

Consider features as well as cost

While many borrowers focus solely on cost, the right features are critical too. It’s important to start by thinking about what you need from your loan right now and what you are likely to need in the near future.

For some, and particularly in this environment, offsetting interest is important. For others, it might be accessing home equity or even support during a career break. It really comes back to your circumstances, goals and life stage. And that’s why starting with a home loan health check is critical – because it considers all of these factors, not just the financials.

Some of the common features that are worth considering include:

Packaged vs. basic loans

Packaged loans allow you to bundle other banking products to access a wider range of features. This could include splitting a loan into part fixed, part variable, accessing credit card facilities and linked offset accounts. These types of loans typically incur a fee for packaging but can include rate discounts and fee waivers.

On the other hand, a basic loan is the no-frills option and may have cheaper rates and fees because the lender is not offering you a range of features. If you don’t need additional features, this may be the option for you.

Repayment pauses

Some loans will offer you the opportunity to pause repayments on your loan, typically only if you are ahead on repayments. This can be a suitable option for those planning a career break, such as parental leave or time out to care for an elderly parent.

It may also be worth considering if these events are on the horizon. You might keep the loan for some years into the future, so thinking ahead is a must.

Principal and interest vs. interest-only repayments

While principal and interest repayments are usually best, there are occasions when an interest-only repayment term may make sense, particularly if you have a temporary period of increased outgoings or decreased income. For example, when you are building or renovating your home and paying rent during the build or taking parental leave, you may need more cash available to cover living expenses.

Going interest-only for even a short period of time is a complex financial decision, and it’s best to seek expert financial advice before going down this path.

Loan portability

If you are thinking about upgrading or downsizing your property in the next few years, then loan portability might come into play for you. It essentially allows you to move your loan to your new property without arranging a new one.

Offset vs. redraw facilities

Using offset or redraw facilities can be a great way to reduce interest while still being able to use your money should it be required, but it’s important to know the difference.

Both facilities allow you to park funds against the loan principle, reducing your interest. The key difference is when and how you can access your funds.

With an offset, you can typically access your money as you would any other bank account, but with a redraw, there may be restrictions or costs involved, so it’s important to make sure you have the right option for your circumstances.

Understand refinancing costs

While refinancing can save money, it may incur upfront costs and it’s important to be aware of these and weigh them against the potential savings.

There may be application, valuation, settlement and/or exit fees involved with moving your loan, so it’s important to factor these in.

For many people, the savings will outweigh any upfront costs in a relatively short period of time, particularly in the current climate.

Your broker will be able to explain the associated costs and calculate the savings over time to give you a very clear picture before you make any decisions.

Is your home loan right for you?

Apt Wealth Home Loans, powered by Mortgage Choice, offers a free home loan health check that takes into account your goals, circumstances and financial situation to determine whether your home loan is right for you.

Speak to your Apt Adviser or contact Apt Wealth Home Loans on +61 3 8779 5254 to find out more.

General Advice warning

The information provided in this blog does not constitute financial product advice. The information is of a general nature only and does not take into account your individual objectives, financial situation or needs. It should not be used, relied upon, or treated as a substitute for specific professional advice. Apt Wealth Partners (AFSL and ACL 436121 ABN 49 159 583 847) and Apt Wealth Home Loans (powered by Smartline ACL 385325) recommends that you obtain professional advice before making any decision in relation to your particular requirements or circumstances.