What does it actually mean to refinance and why you should do it

With rapidly rising interest rates causing Australians to fork out hundreds (potentially thousands) more for their monthly mortgage repayment, there has been a lot of chat around refinancing and cashbacks. But what does it mean and how do you do it?

Perhaps you’ve been making your monthly mortgage payments diligently for years and now you’re wondering if you could be saving more money each month – or maybe you’ve got some big expenses on the horizon, and you want to tap into your home’s equity.

Whatever your reason, refinancing can potentially help you save money or get the cash you need for those long-awaited home improvements.

Before refinancing, it’s important to consider all aspects as to whether it’s right for you. Picture: Getty

But before you go jumping into a new home loan, here are five things you should consider about refinancing.

1. Why would you refinance?

Refinancing your home loan means that you’re replacing your current mortgage with a new one, typically to get a lower interest rate, reduce your monthly payments, change the loan terms or access the equity in your home.

Peter Bouhlas, Bankwest’s General Manager – Home Buying says “Every customer is unique so understanding their individual circumstances is critical when it comes to supporting them on their refinance journey”.

These are some of the most common reasons why people refinance:

• The new loan may have a lower interest rate or a longer repayment term, which could reduce your monthly mortgage payments. Alternatively, you may choose to refinance to a shorter-term loan in order to pay off your mortgage sooner and save on interest accrued over the life of your loan (however the latter option would see your repayments increase).
• If you have a variable-rate mortgage, refinancing to a fixed-rate mortgage can provide you with stability and predictability in your repayments. Conversely, if you have a fixed-rate mortgage, refinancing to an adjustable-rate mortgage may offer a lower interest rate, lower repayments and flexibility to pay more (or redraw) into your loan.
• Refinancing may also provide you with access to the equity in your home, which could be used for a variety of purposes, such as home renovations, debt consolidation, or to cover other expenses.

There are other reasons beyond a revised rate that you might consider refinancing:

• Offset accounts linked to your home loan can help you pay it off sooner. Any money you put in this account works like you’ve reduced the balance of the loan, which reduces the interest you pay. Does your current loan have an offset account or multiple offsets? If not this is definitely something to consider.
• Ongoing fees: The home loan you’re currently on may have charges like monthly or annual fees, redraw fees or charges for an offset account. These fees can increase your repayments, but not all loans include them. With a Bankwest Simple Home Loan, with no offset account linked, you pay no ongoing fees.

For an early indication of whether refinancing is right for you, use Bankwest’s refinance calculator to give you an estimate of your monthly repayment costs to help you determine whether refinancing could save you money.

2. What does refinancing involve?

First of all, refinancing comes with its own set of costs.

These costs can include things like valuation fees, exit costs and new loan establishment fees, so you’ll need to crunch some numbers to make sure the potential savings from refinancing outweigh the costs of making the switch.

Once you’ve decided that refinancing makes sense for you, it’s time to start shopping around for lenders – and this is where things can start to get interesting.

Do your research as to whether you’re better off with your current lender, or a new one. Picture: Getty

Think of it like online dating, but for mortgages. You’ll be swiping left or right on lenders based on their interest rates, fees, and customer service. And just like with dating, you’ll want to do your research and read reviews before committing to anything.

Once you’re approved, congratulations! You’re on your way to a new mortgage. You can start enjoying the benefits of your newly refinanced mortgage following the completion of the necessary paperwork.

Whether you’re saving money each month or accessing your home’s equity, it’s a good feeling to know that you’ve made a smart financial move.

3. Can you refinance with the same lender?

While there are instances where it may be possible to refinance with the same lender, refinancing typically involves moving your mortgage to another lender.

“However banks like Bankwest offer Home Loan Health Checks for existing customers, which are an opportunity for customers to review their home loan and options available to ensure they’ve still got the right home loan,” Peter says.

“Reviewing your home loan could mean you get better interest rate, or more flexible features to help you save money and pay off your mortgage sooner.”

It’s important to shop around and compare offers from multiple lenders to ensure that you’re getting something that is right for you. And even if you decide to refinance with your current lender, it’s still a good idea to research other lenders and see what rates and features they offer.

Brokers have awarded Bankwest the Australian Mortgage Awards, Bank of the Year 2021 and 2022. If you’re using a broker, chat to them about how Bankwest might be a good fit when your look to refinance.

4. Is now a good time to refinance?

Refinancing when interest rates are changing can still be a good idea, depending on your individual financial situation and goals.

Even if interest rates are rising, your current interest rate may still be higher than what is currently available. If you can refinance to a lower interest rate, you may still be able to save money on your monthly mortgage payments.

Refinancing doesn’t just lower mortgage rates, it can provide stability and free up money for other things. Picture: Getty

If you have significant equity in your home, refinancing may still be an option to access that equity, even if interest rates are rising. This can be particularly useful if you are planning to stay in your home for a long time.

Your home’s equity is simply the difference between its current value and the mortgage you have against it. If your home has increased in value since you purchased it, then you likely have some built-in equity that you can use to borrow against when it comes time to refinance.

In this case, refinancing to a fixed-rate mortgage may provide you with stability and predictability in your monthly payments, regardless of changes in interest rates.

“Identifying the best time to refinance is almost completely dependent on borrowers’ individual circumstances, so it comes down to finding a lender that is willing to take the time to adequately understand customers’ needs and expectations,” Peter says.

5. How to find out if refinancing is right for you

Seeking advice from a financial planner, mortgage broker or reach out to Bankwest to see how they can help you navigate the process and make a more informed decision about what’s the best deal for you.

Refinancing can be a complex and confusing process, and there are many factors to consider before making a decision.

source: rea.com.au