Purchasing a property is such an exciting time. You’re proud of your achievement (as you should be) and you feel like you’re making some great steps towards securing your financial future. After the first few months of making your repayments, and watching interest rates increase, you begin asking yourself “how soon can I refinance my home loan”.
We’re always looking for a better deal that can increase our cash flow, right? In this post we’ll dive into some of the key considerations that might determine when you might be able to refinance.
What is refinancing?
First things first, some housekeeping. When refinancing your home loan you take out a new loan to payout your existing loan. This can be with a new lender or your existing lender.
When did you purchase your house?
When you purchase a property using a mortgage you need to understand that you’ve entered into a contract with your lender for the loan term, usually 30 years. Because of this, it’s important to remember that when you refinance you’re actually breaking that contract with your current lender. This can certainly be done, however, the closer you are to the beginning of your loan the greater likelihood of higher break costs.
This can also be the case if you've owned your home for many years, like an investment property, and have recently refinanced, as this is a new contract with your new lender. The good news is, your contract will list all your fees and when those fees might be triggered.
Do you have a Variable Rate loan?
A great feature of a variable rate home loan is they are often more flexible when it comes to refinancing and incur lower break fees. In fact, if your current variable rate home loan was settled on or after 1 July, 2011 it will not incur any early repayment fees. This is due to changes to the National Credit Code, which protects consumers who borrow funds to purchase residential property.
With that said, there will likely be a mortgage discharge fee, which covers the cost of processing the paperwork for finalising each aspect of the home loan. You could expect this fee to be around the $350 mark.
Do you have a Fixed Rate loan?
Unlike variable rate products, fixed interest rate loans are not as flexible when it comes to breaking or repaying the loan before the fixed rate period is up. In fact, if you look to refinance close to the start of your fixed loan commencing, you can expect to be quoted some pretty hefty break costs.
For this reason, if you’re looking to refinance soon after your fixed rate term begins, you’ll need to spend some time calculating your total break costs to understand if you’ll actually save money. This is when working with a mortgage broker can come in handy, as they’ll walk you through all your costs and provide you with all your options.
Do I need equity in my home to refinance?
If you’ve owned your property for a while or you put down a good sized deposit at purchase, it could be a good time to refinance. That being said, there are some key considerations when it comes to refinancing and your equity position.
Firstly, what was your loan-to-value ratio (LVR) when you purchased your property? Knowing this can potentially save you thousands. Essentially, if you refinance to an LVR greater than 80% you’ll likely be required to pay an additional Lenders Mortgage Insurance (LMI) premium.
Let’s run two quick examples:
Scenario 1:
Purchase price: $850,000
Initial loan: $680,000
Initial LVR: $80%
Value (at refinance): $900,000
Loan (at refinance): $650,000
LVR (at refinance): 72%
Scenario 2:
Purchase price: $850,000
Initial loan: $765,000
Initial LVR: $90%
Value (at refinance): $900,000
Loan (at refinance): $765,000
LVR (at refinance): 85%
In Scenario 1, when you first purchased the property your LVR was 80%, and your when you refinanced your LVR is less than when you first purchased your property, which means you could theoretically refinance without incurring additional LMI costs. However, in Scenario 2, your initial LVR was 90%, which likely means you would have paid an LMI premium at settlement. When looking to refinance your LVR is still above 80%, which means you’re likely to incur an additional LMI premium.
With the above in mind, a mortgage broker has a great understanding of all the lenders who might be willing to waive these LMI premiums, which means a refinance may very well make sense. At the end of the day, the more equity you have in your property, the greater the likelihood a refinance would make sense.
Do you have a strong financial situation?
Before you start looking to lenders to begin your refinancing journey, it is so important to make sure that you’ve taken a good hard look at your financial situation. Just because you were able to secure your initial home loan does not mean you’ll be able to secure a refinance if you’ve gone on a spending spree, or fallen into some unexpected financial hardship.
Lenders want to make sure you’re going to be in a strong financial position to make your mortgage repayments each month. So, make sure you take that time to review your expenses for the last three months, ensuring you had a good surplus of funds at the end of each month. If you’ve found yourself in some tough times, consider waiting a month or two before you apply for a refinance to allow your finances to get back on track.
If, however, you need to refinance because you're struggling to make ends meet, then please reach out to your mortgage broker as they can help guide you to improve your financial position as well as help you find a lender who will be empathetic to your situation and are likely to refinance your loan.
Deciding when is a good time to refinance
When it comes to deciding when you can refinance your home loan, the ultimate decision comes down to knowing your end goal. If your current loan is a variable rate loan, then you’ll likely be able to refinance as soon as you find a better deal. However, if you’re on a fixed rate loan, consider waiting until your fixed period has ended or speak with your mortgage broker to understand your break costs before you pull the refinancing trigger.
You will always have options and the ability to exit a loan contract, even if that means you incur some costs (which is not ideal). However, working with a mortgage broker is often the fastest and easiest way to determine when you can refinance your loan and if it is in fact the best decision for your financial situation.
If you’re looking to refinance or aren’t sure if you’re able to refinance, get in touch with our team for a complementary loan review. On 1300 799 702 or click here to book a time for a video call.
