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Home loan guide / Refinancing

When to refinance

4 min read

Lucinda Starr

Getting a home loan is only the first step. To make sure you’re getting the best deal, you need to have a sharp eye on home loan interest rates so you can switch when it makes financial sense.

Refinancing a home loan involves taking out a new loan to pay an existing loan. There’s a bunch of ways to refinance and each come with different benefits (whether that’s to consolidate debts or get a better rate).

And right now, more Australians are refinancing than ever before. The latest ABS stats show that an all-time-high of $17 billion worth of loans were refinanced in July 2021. It’s a combination of historically low interest rates and a stack of cash back deals from lenders causing this refinancing boom.

Clearly, it’s worth scoping out which type of refinancing is right for you and how long it’s going to take you to recoup the costs of refinancing. So, let’s run you through what you need to know about when to refinance.

How a lower loan-to-value ratio (LVR) can help you score the best deal when refinancing

Here’s the thing: lenders are having to compete for business from borrowers (like you). So, to stand out from the competition, many are offering big rate discounts to those with lower loan-to-value-ratios (LVRs).

If you haven’t come across this lingo before, LVR is the amount of your property’s value you still have to pay off, shown as a percentage. As you pay your loan back, your LVR drops.

So, if you've got a low LVR, you’re likely to score a better deal when refinancing.

Take this example: let’s say you refinance with a 70% LVR. You could score a variable rate that’s 0.51% better than a 90% LVR loan.

In practical terms, if you’re paying off a $400,000 mortgage over 25 years, you’d be saving up to $107 per month in repayments (or up to $32,000 over the life of your loan). That’s a good reason to shop around, right?

Using refinancing to get rid of Lender’s Mortgage Insurance

Did you get hit by Lender’s Mortgage Insurance (LMI) when you first took out your loan? If that’s the case, you may be able to use refinancing with your current lender to score a partial refund on LMI.

Not sure what the heck LMI is? If you need to borrow more than 80% of your property’s value, lenders will charge you a thing called LMI (a one-off cost that protects the bank in case you’re unable to repay your loan). Generally speaking, the more you borrow, the higher your LMI premium.

But let’s get back to how refinancing can help you recoup some of your LMI costs. In some cases, lenders will refund 40% of your LMI premium if you pay back the loan within the first year (or 20% if it's repaid within the first one to two years).

After two years have passed, typically no refund is offered. So, if you manage to pay down your loan quickly and opt to refinance with the same lender, you can use this partial refund to help pay for the costs of refinancing.

Lifebuoy at a dock

Cash-out vs rate-and-term: what refinancing option should you pick?

The most common type of refinancing is a rate-and-term refinance. In a nutshell, it’s designed to change your interest rate and/or the term of your loan, while keeping your loan amount the same (well, except for the extra cost to cover refinancing).

On the flip side, a cash-out refinance is done when you want to borrow a bit extra on top of your existing loan. Typically, this means converting some of your home’s equity to increase your loan’s principal amount. That way, you'll score extra cash in hand at the end of refinancing to put towards things like renovations, repairs or landscaping.

But here’s what you need to know about cash-out refinancing: in some cases, you may pay a higher interest rate (as this loan may be riskier for some lenders). So, make sure to run the numbers and figure out which type of refinancing is right for you.

How long does it take to recoup the costs of refinancing?

Before you run off to refinance, remember this: refinancing usually comes with extra upfront costs.

How much you have to pay depends on a number of factors, such as whether you stick with the same lender or take your loan to a different provider.

So before you get started, it’s worth crunching the numbers to figure out when you’ll break-even (a.k.a. When the amount you’re saving outweighs how much it cost you to refinance).

To work out this ‘break-even point’, you need to:

  • Step one: add up all the costs of refinancing (including the cost of closing the old loan as well as opening your new one).

  • Step two: calculate how many months it’ll take for you to break even. Try dividing your total refinancing costs by your monthly savings.
    • Take this example: let’s say it costs you $3,000 to refinance and you’ll be saving $100 a month on this new loan. That means it’ll take you 30 months to reach your break-even point.

Not sure whether it’s worth refinancing? Check out our refinance calculator to figure out how much you could save by refinancing with Tic:Toc.

When it comes to deciding how to refinance and when refinancing makes sense, it all depends on your current situation and goals. Your best bet is to assess your options and check if there are more competitive loan options available.

Being proactive about refinancing can save you thousands of dollars and switching is usually easier than you think. So, figure out what type of refinancing is right for you and how much it’ll cost you to decide when is the right time to make your next move.

Lucinda Starr is Head Copywriter and Founder at Starr Studio. Previously, she's worked as a Content Manager, Social Media Strategist and Writer for Broadsheet, Concrete Playground, BuzzFeed Australia and beyond.

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