5 factors to consider before refinancing a mortgage

With many consumers “still pursuing it to secure the best rates,” she is still hesitant to recommend it to every home owner.

Here are five factors mortgage holders should consider before deciding to take the refinancing plunge.

1. Some home owners can’t refinance because they’re “mortgage prisoners”

Giamalis cautioned that some people are mortgage prisoners who are not able to purchase or refinance because of the currently high interest rates.

“While rates were around 1.9 per cent two years ago, they have now increased to 6 per cent, making it challenging for many to refinance,” explained Giamalis.

That’s because banks “always buffer the rate, adding 3 per cent when doing a loan. That means, if you are applying for a loan with a rate of 6.14 per cent, the lender will need to assess your ability to service the loan with a rate of 9.14 per cent”.

With many individuals’ incomes not able to service higher rates, it’s not always cause for alarm.

The lead broker stated that those coming off a fixed-rate mortgage should “talk to an expert to explore options for improving your refinancing eligibility”.

“With the stage three tax cuts in July, it’s a good time to understand how these changes might affect your ability to afford a better home loan rate.

“For some, these tax changes could unlock the door to refinancing, opening up opportunities for a better home loan deal.”

2. Possibility of break costs when refinancing on a fixed rate

The lead broker advised that refinancing is not recommended when on a fixed rate as the new rate will likely be lower than the current interest rate, and can incur additional costs as a result.

Giamalis detailed that “if a person breaks a fixed rate early, they can be liable for payment in advance fees and penalty interest”.

“For example, if someone has locked in a fixed rate at 6.9 per cent and the rate has dropped to 6 per cent, they may have to pay a huge break cost if they refinance to the lower rate.”

“Another time you wouldn’t want to refinance is if you’re looking to sell soon because there’s no point,” Giamalis added.

3. Define your break-even point

Mortgagors are able to refinance as often as they want as long as their mortgage has been with an existing bank for a minimum of three months.

However, Giamalis cautioned that the bank fees and government charges to discharge and then register a mortgage can together cost “hundreds of dollars each time you refinance”.

The broker reminded banks will “charge interest to date” – something that many people forget.

“If you get charged interest on the first of every month and refinance on the 15th, the bank will charge the 15 days’ interest in one payment.”

She stressed the importance of figuring out your break-even point.

“You want to know when your savings from your new loan outweigh the costs you paid to refinance.”

4. Cashback deals can be misleading

Even when cashback deals for refinancing appear enticing, the broker stated that home owners should “do the math on the interest rate”, as they could end up paying more over time, even with the initial cash injection.

Dispelling the recent popularity of this arrangement, Giamalis emphasised that “cashback offers aren’t a new trend as they tend to come and go over the years”.

“I know people who will only want a bank with a cashback offer and then work out the savings on a cheaper interest rate, which could be $2,000 or more in the first year on a cheaper rate, and the person is happy to leave the cashback offer.”

She advised anyone considering a cashback to research beyond the offer, “specifically how the interest rate will compare over time and how much of it will be absorbed by switching fees”.

5. Refinancing to a longer loan term could result in higher interest payments

When refinancing, Giamalis advised mortgagors to maintain their current loan period, as not doing so can run the risk of costing more in interest over time.

The broker explained that “generally, the first five years of a mortgage over 30 years is interest”, with subsequent refinancing then taking a home owner “backwards”.

For this reason, she suggested home owners on a 20-year loan that fits within the bank’s terms should stick with this loan period, as otherwise they will get “charged another 10 years of interest”.

“Although it may reduce the monthly repayments and it might provide some short-term relief, it will catch up with you. I avoid recommending this strategy to my customers as it is just sending them backwards,” she concluded.