Mortgagors beware: What to look for when it’s time to refinance

Lower interest rates and cashback offers are great, but they're not the be-all and end-all of refinancing.

Lower interest rates and cashback offers are great, but they're not the be-all and end-all of refinancing. Photo: Getty

Thousands of Australian mortgage holders want to refinance in the next six months, but experts say there are key factors to consider.

Finder data shows about 594,000 mortgagors are planning to refinance their home loan by July.

Richard Whitten, home loans expert at Finder, said many will be looking for some financial relief as some households are missing meals and bill payments, along with facing the possibility of losing their homes amid the cost-of-living crunch.

“Cash flow is a major concern right now and many aren’t earning enough to keep up with interest rate hikes,” he said.

“The mortgage is often the biggest household expense and also the greatest opportunity for savings.

“Even loans that are less than 12 months old need to be re-evaluated.”

Lower interest rates, offset accounts and sign-up cash bonus offers are sitting at the top of refinancers’ wish lists, according to Finder data.

But mortgage and finance experts told TND there’s more to consider when looking to refinance.

Cash back isn’t everything

Deanna Ezzy, director and primary broker at More Than Mortgages, said a refinance rebate (also known as a cashback offer) can be a nice “cherry on top” of a refinance option.

But it shouldn’t be the basis for your final decision.

She said while cashback offers are often double or quadruple the cost of switching banks, it might not be worth the hassle of the paperwork and switching bank accounts if you only have a small amount left to repay and have sizeable savings in an offset account.

Instead, you should focus more on other factors, like how you want your account structured, and whether banks will allow you to have multiple offset accounts.

“A lot of people these days have a bills account, salary account, savings account, they might have a kids account,” Ms Ezzy said.

“And if they’ve got five different accounts with all different buckets of money, if they go to a bank that gives them multiple offsets, then that’s gonna save them more interest in the long run over getting a lender with one offset with a cheaper rate.”

If you do end up with a cashback offer, Antoinette Mullins, certified financial planner and Steps Financial principal, said you should save it as a buffer against the rising interest rates in the short term.

Later, when you’re feeling more financially stable, you could put the money towards whatever you want; an extra mortgage repayment, repayment for other loans such as a car or HECS debt, or to treat yourself if you are debt free.

Interest rate size isn’t everything

Many people looking to refinance may automatically be interested in the lowest interest rate available.

But Ms Ezzy said you should take the size of your remaining home loan debt into account before rushing off to the cheapest option.

She said she’d generally consider any offer that would save her more than $1500 per year.

“If it’s going to cost [a refinancer] $900 to switch banks, I want to make sure they’re saving at least $1000 a year moving forward,” she said.

But keep in mind the big picture; Ms Mullins said even a 0.5 per cent lower rate might be worth the move if the lender is also offering other incentives.

Longer loans cost more long term

Extending your home loan may make repayments slightly cheaper right now, but Ms Mullins warns it will end up costing your more in the end.

“The repayments are calculated based on the amount that you owe and the duration of the loan,” she said.

“So it certainly helps short-term cash flow, but it can cause a lot of pain later on, because you’re actually agreeing to a longer term and therefore the interest amount that you pay over [the extended] years will be more – the bank wins.”

However, if you select a refinance offer that allows you to repay more than your minimum repayments, that could help dampen the sting of an extended loan’s long-term extra costs.

Understand your borrowing capacity

Ms Mullins said many banks will approve additions to exisiting loans when it’s time to refinance, which mortgagors are often tempted to accept to pay for things like renovations or holidays.

But just like when you applied for your initial home loan, you should take into account your ability to repay.

“Quite often, clients come back to us and say, ‘Oh, the bank has approved a loan of $800,000 on our current property, but we only want $500,000′,” Ms Mullins said.

“When you consider refinancing … and you’re ready to actually apply for the loan, you have to consider your current situation and whether it’s appropriate for you to take on that much debt.

“We don’t want to affect our lifestyle. We don’t want to scrimp on things like the kids’ education or those other important goals when interest rates keep going up.”

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