Knowing when to refinance your home loan
Refinancing your home loan could save see you money that would otherwise be spent on interest. Making the right move at the right time could maximise your savings, but how do you know when to refinance? Keep reading to learn the basics and find out how to make a smart decision about the future of your home loan.
Is it time to refinance your home loan?
Refinancing your home loan could be easier than you think. Many people aren’t sure what’s involved in refinancing, and then there are those who just don’t know what interest rates they’re on. But the majority of homeowners are just not sure when is best to refinance their home loan.
By refinancing your home loan, you could potentially take years off your home loan term and possibly save thousands of dollars in the process. However, you need to get your timing right; refinancing your home loan at the wrong time may end up driving up your costs.
Refinance with a good credit rating
If you have a good credit rating, it might be a good time to think about refinancing your home loan. Most loan applications involve a thorough credit report check by your potential lender, and home loan refinancing is no exception.
A credit report is basically your credit history. It includes information about your existing credit and types of credit, if you have made credit card repayments on time, how many applications you have made, and if you have been involved in serious infringements etc. A good credit score boosts your chances of landing a loan.
If you know your credit score is looking pretty healthy then it could make sense to apply for home refinancing. On the other hand, if you’ve got a fair bit of debt hanging around you may want to pay that down before you refinance your home loan, as you could stand a better chance of succeeding in your application then. You also may want to stop charging things to your credit card until you’ve finished refinancing.
Refinance when the economy is upbeat
A growing economy is sweet news for banks – they love it when the markets are upbeat, when consumer confidence is high, and when businesses are in expansion mode. That is when money keeps flowing through the economy and consumers are happy to spend.
This means that you need to be on the lookout for signs of such an upswing, in order to take advantage of interest rates. When the economy starts picking up, interest rates from lenders tend to be better for borrowers, as lenders tend to want to encourage borrowing. That’s when you may want to make your move, because delaying further and waiting longer could mean higher rates that may prove costly in the long term.
Consider a lower rate, but compare with exit fees
Many homeowners tend to be attracted to lower interest rates for obvious reasons – it makes sense to switch over to lower interest rates that would save dollars. However, you need to do the math to see if the switch is worth the cost.
The cost of refinancing can include exit fees, depending on your lender and where you’re up to with your loan repayments. While a lower interest rate, perhaps around 2% less than the one that you are currently on, may look pretty in the face of it, you need to compare that with the exit fees you would shell out and calculate if your refinancing is worth the cost - hint, your broker can help with this.
Review your home loan regularly
Remember that the world of interest rates is constantly changing, and you need to keep reviewing your home loan on a regular basis - we recommend checking in about once a year. It doesn’t take much for interest rates to change, since developments at one end of the world could have an impact on the other end in a matter of months, if not days.
However, that’s not to say that you need to keep refinancing your home loan every couple of years – you should be mindful of the costs involved in switching loans, and refinancing all the time could cost you much more than what you could gain. Watch out for the right opportunity and stay in touch with your broker.
The Australian business cycle has typically lasted between two to five years, which has a direct impact on interest rates. It pays to keep an eye on interest rate movements over this kind of timeframe to know where the rates could be headed.
Know your rate expiration dates
Interest rates on home loans can be fixed rates, variable rates, or partially-fixed rates. You need to pick a rate that’s right for you. Fixed rates typically have a lock-in period that can range from one to five years.
If your fixed rate is coming to an end over the next few months then it’s time for you to start watching interest rate movements and trends. A declining trend in interest rate could mean it’s time for you to refinance your home loan and opt for a variable interest rates. On the flipside, a trend that shows rates are already low and have been declining over a few months could be mean it’s time for you to turn to a fixed rate.
Either way, knowing your rates and watching economic trends can help you make smarter decisions that could save you money when refinancing your home loan.
Is now a good time for you to refinance your home loan but you’re not sure why you should? Follow our complete guide refinancing to find out why you should refinance and some of the benefits that may come from making the change.