Refinancing a Home Loan: 5 Reasons to Consider Refinancing in 2023

If your home loan repayments are becoming unmanageable, refinancing your home loan can relieve financial stress and allow you to renegotiate the terms of your mortgage to better suit your needs and goals.

Of course, the decision to refinance should be carefully considered depending on current interest rates, your personal financial situation, and whether you want to pay off your home loan quicker.

As of 2023, Australian home loan rates are continuing to rise. If you have a variable home loan or you’re soon exiting your fixed-rate mortgage, the strain of paying rising interest rates can lead to a significant financial burden.

Here are five reasons why you should consider refinancing your home loan in 2023.

1. Lower Interest Rates

If you took out your home loan when the average interest rate was exceptionally high, you can choose to refinance with a new or existing lender to reduce your monthly home loan repayments. This can make your existing debt more manageable and help you save money in the long term.

The big four banks of Australia predict that the national interest rate will begin to drop at the end of 2023, so choosing to refinance your home loan in 2023 is an excellent way to cut the amount you owe to lenders.

For some, switching to a lower-interest-rate home loan is a worthwhile strategy. You’ll not only be able to reduce the amount you owe on your loan, but you won’t need to increase your budget – helping you to pay off your home loan faster.

2. More Manageable monthly repayments

Many more Australians face mortgage stress in 2023, with cash rate hikes since May 2022. Mortgage repayments are already causing major financial strain for many, with 880,000 Australians facing an end to their fixed-rate home loans this year. Mortgage interest rate for a three-year fixed-rate home loan currently ranges from 5.25% to 5.99%, which could dramatically increase the cost of monthly loan repayments.

If you choose to refinance your home loan, you’ll likely be able to reduce your mortgage repayments to make them more manageable going into 2023 and 2024. Home loan refinancing is designed to give you a better interest rate on your new loan, effectively helping you to save money while still making regular payments.

Home loan refinancing won’t be enough for some, and the rising interest rate will continue to cause significant strain. If this is the case, ask your mortgage broker if switching to making interest-only payments will be better for your scenario or if they can ask your current lender to look to extend the length of your home loan.

3. Reduced Loan Term

When you refinance your home loan, you can choose to shorten the term to pay off your loan sooner. For instance, if you’re three years into a 30-year home loan with your current lender, you can switch to a 15-year term with your new loan. While your monthly repayments will be considerably higher, you’ll face less debt in the future.

4. Access Home Equity

If you’re a homeowner with significant equity in your property, choosing to refinance your home loan can help you to access tax-free cash built up in your home. By taking out a new loan, known as a cash-out refinance loan, you’ll have funds that can be used for home renovations, debt consolidation, or as retirement funds.

Accessing home equity is only an option for certain homeowners with significant equity already built up in their property. They will likely be far through their existing home loan. If you’re early into your home loan with your current lender, you won’t be eligible for a cash-out refinance loan.

5. Change your home loan type

For Australians on an adjustable-rate mortgage, interest hikes can lead to unmanageable monthly repayments, causing unpredictability and increased mortgage stress.

By refinancing your home loan and switching from a variable home loan to a fixed-rate loan, you’ll face more stability and predictability when making your monthly mortgage repayments, allowing you to budget better and save your disposable income.

Choose a better home loan with Lendstreet

At Lendstreet, we understand the importance of finding the right home loan for your individual needs. That’s why we offer our clients a range of loans, whether you’re a first-time buyer or looking for a new investment property.

We understand the Australian home loan market like no other. If you’re interested in refinancing your home loan, book a discovery call with one of our experts, who will give you up-to-date guidance and advice to help you make well-informed decisions. Book here.

FAQs

What is a fixed-mortgage rate?

In a fixed-rate mortgage, homeowners face the same interest rate for the entire loan term duration. This means that the borrower’s monthly mortgage payments remain the same throughout the life of the loan, regardless of any changes in the broader interest rate.

Do I still need to pay LMI when refinancing?

When refinancing a home loan in Australia, whether or not you’ll need to pay LMI (Lenders Mortgage Insurance) depends on various factors. LMI is typically required when the loan-to-value ratio (LVR) exceeds 80%. It is an insurance that protects the lender in case the borrower defaults on the loan.

If you initially obtained a loan with an LVR over 80% and paid LMI, refinancing alone does not automatically remove the LMI requirement. When refinancing, the new lender will consider the LVR based on the property’s current value and the new loan amount. If the LVR remains above 80%, the new lender may require LMI.

However, if your property has significantly appreciated in value since you obtained the original loan, the LVR may drop below 80% upon refinancing. In such a scenario, you may be able to avoid paying LMI with the new lender.

It’s essential to note that lender policies and guidelines may vary, so it’s advisable to consult with potential lenders or an experienced mortgage professional to understand their specific requirements regarding LMI during the refinancing process.

Can you refinance with your existing lender?

Yes, it’s possible to refinance home loans with an existing lender. In fact, many borrowers choose to do so because they may already have an established relationship with their current provider and may be able to negotiate a better mortgage interest rate. If your current loan is unmanageable, contact your existing provider.

Do I need to pay exit fees if I pay off my mortgage sooner?

Thanks to the National Consumer Credit Protection Act (NCCP), lenders can no longer charge exit fees on home loans taken out after 1 July 2011. However, home loans taken out before this date may face early repayment fees (exit fees) or a “deferred establishment fee”. This will be charged if you pay off your home loan earlier than the agreed terms.

What is a discharge fee?

A discharge fee, also known as a mortgage discharge fee or settlement fee, is a fee charged by a lender when you fully repay or “discharge” your mortgage loan. It is typically applicable when you sell your property, refinance your mortgage with a different lender, or pay off your loan in full before the scheduled end of the loan term.

The discharge fee covers administrative and processing costs incurred by the lender when closing out your mortgage. These costs may include tasks such as finalising the paperwork, removing the lender’s interest in the property title, and updating relevant records.

The specific amount of the discharge fee can vary depending on the lender and the terms of your loan agreement. It is typically a fixed amount, although it can also be calculated as a percentage of the loan balance or property value. The fee is usually disclosed in your loan documentation, and you can inquire about it with your lender when planning to discharge your mortgage.

It’s important to note that discharge fees are separate from any early repayment fees or break costs that may apply if you pay off your mortgage early, which are related to the loss of interest the lender would have earned over the original loan term.