How to Know When to Refinance Your Home Loan in Truganina

You should refinance when the savings from a new loan clearly outweigh the cost of switching. That is the whole test, and this article will help you work it out for your own loan.

If you own a home in Truganina, in Melbourne's west, you may have wondered whether your loan is still doing its job. Refinancing just means replacing your current loan with a new one. The new loan can be with a different lender or with your current lender. Nothing about it is complicated once the steps are explained.

When Is the Right Time to Refinance a Home Loan?

The right time is when something has changed: your rate, your fixed term, your finances or your plans. If nothing has changed and your loan still suits you, staying put is a perfectly sensible choice.

The common triggers are these:

• Your fixed rate period is ending.
• You suspect you are paying more interest than a new customer would.
• Your income or spending has changed and you want different features.
• You want to use the equity in your home for a renovation or another property.

A loan health check is a good first step. It looks at your current rate, fees and features side by side, so you are not guessing.

What Happens When Your Fixed Rate Period Ends?

When a fixed rate ends, your loan usually rolls onto the lender's variable rate, which may be higher than what other lenders offer. That makes the weeks before expiry a natural moment to compare your options.

You have choices. You can accept the rollover, fix again, or move to another lender. Our page on fixed rate expiry walks through these in more detail. Timing matters because leaving a fixed loan early can trigger a break fee. Waiting until the fixed term ends usually avoids that cost.

How Much Could You Save by Refinancing? A Worked Example

A lower rate only helps if the savings add up to more than the switching costs. The example below shows how to check that.

Consider a homeowner with a $500,000 loan and 30 years left. At an illustrative rate of 6.75% p.a., the monthly repayment is about $3,243. A different lender offers a rate 0.50 percentage points lower, which for this example is 6.25% p.a. At that rate the repayment is about $3,079, a difference of roughly $164 a month.

Switching has costs, so the homeowner adds them up. Say the discharge fee, new loan fees and any other costs come to $1,500 in total. That is about nine months of savings. After that, the lower repayment is money back in their pocket each month, as long as the rate gap lasts.

There is one trade-off. If the homeowner took a fresh 30-year term when they had 25 years left, repayments would drop further, but they would pay interest for five extra years. Keeping the original term, or paying the same amount as before, avoids that. These are illustrative figures only, and your own numbers will differ depending on your lender and loan size.

What Does It Cost to Refinance?

Refinancing can involve a discharge fee on your old loan, an application fee on the new one, and a break fee if you leave a fixed rate early. Each lender sets its own amounts, so ask for them in writing.

Since 1 July 2011, lenders have generally not been allowed to charge an exit fee on new residential home loans. Break fees on fixed loans and discharge fees are different, and they can still apply. If you have less than 20 per cent equity, you might also face lenders mortgage insurance on the new loan, which can add to the cost.

A good broker should compare your total savings against these costs before recommending a switch. If the numbers don't stack up, the honest answer is to stay where you are.

Can You Refinance to Access Equity?

You may be able to borrow against your equity, which is the gap between what your home is worth and what you owe. The amount you can actually borrow depends on the lender's valuation, its maximum loan-to-value ratio and whether you pass its serviceability assessment.

People use equity release for renovations, to consolidate debts or to fund a deposit on the next property. The trade-off is a bigger loan, which means more interest over time and higher repayments. A refinance that adds to your debt is also assessed more closely than a like-for-like switch, because the lender checks that you can afford the larger loan.

If the money is for an investment property, the tax treatment depends on how the borrowed funds are used. Speak with your accountant before you act. If you are weighing up a second property, our page on investment loan refinancing covers that path.

What Does the Refinance Process Look Like?

The process runs in a few stages: a chat about your goals, a comparison of lenders, an application, a valuation, approval and settlement. Your new lender then pays out the old loan for you.

The lender will ask about your income, spending and debts to check the loan suits you. If your repayments have been on time for around a year, that history usually works in your favour. Many people also find it useful to ask for a lower interest rate from their current lender before switching, because sometimes a phone call is enough. Our overview of home loan refinancing covers each stage in plain language.

If you bought through the 5% Deposit Scheme, check the rules first. Switching to a lender outside the scheme can end its benefits.

You don't have to decide anything today. Call one of our team or book an appointment at a time that works for you, and we will go through your loan with you, step by step, with no jargon.

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