When can you refinance a home loan? Well technically any time. But there are some times when it’s a good idea to consider it. As home loan experts, we’re often asked ‘when can you refinance a home loan? And technically speaking, once your home loan has settled, you can refinance it whenever it suits you. However, there can be ‘right’ (or better) times or reasons to refinance, just as there can be ‘wrong’ times or reasons. So let’s briefly remind ourselves what refinancing is and then dive into when you can (or should!) refinance your home loan.

What is refinancing?

In the simplest terms, refinancing a home loan means moving your loan from one lending institution to another, or from one home loan product to another with the same lender, after your mortgage is in place. How long the refinancing process can take and whether you should refinance are topics we’ve recently tackled. But the question of when you can refinance brings a few new issues into play.

When can you refinance a home loan?

If looking to refinance, you’ll want to make sure you’re doing it at the ‘right’ time or for the ‘right’ reasons – and be prepared for all the questions your potential new lending institution will ask you. So what are those ‘right times’?

After 12 to 24 months

Broadly speaking, there’s little financial incentive or reason to refinance your home loan unless you’ve had your mortgage for at least 12 to 24 months. Every mortgage comes with associated fees and costs, which are generally an average of 2% to 5% of the loan amount. Changing your home loan too soon or too often might see those fees racking up in a way that offsets any other potential savings you might have.

If you’re able to get a lower interest rate

When it comes to answering the question of when can you refinance a home loan, one of the best times to refinance is when you’re able to get a lower interest rate. A good rule of thumb is you should refinance if you can reduce your interest rate by 1%. These savings will ensure that the costs associated with the refinancing are worth it. Reducing your interest rate will save you money in the short term. But it can also help you build up the equity in your home more quickly and reduce your monthly repayment.

To shorten the term of the loan

If you are able to refinance to another loan with a shorter term without much change in the monthly payment, you should certainly take that opportunity. If you have a 30-year fixed-rate mortgage on a $500,000 home, and you refinance to a lower interest rate and with a 15 year term, you might see only a slight change to your repayment amount. And that will see you significantly decreasing the cost of your home loan without much impact on your lifestyle. A big win.

You need to access the equity in your home

Despite most homeowners wanting to pay off their loans as quickly as possible, sometimes major life expenses come up. You may need to do some renovations, or pay for school fees. Refinancing lets you access the money that you’ve already ‘saved’ in your home. And the interest rate is generally less than rates for personal loans or other unsecured loans.

To opt out of mortgage insurance

It’s a great time to refinance when you’ve gained enough equity in your home to obtain a loan without mortgage insurance. But mortgage insurance isn’t cheap, and it’s generally built into your monthly loan payments. If you can switch to a loan without mortgage insurance you’ll save those extra funds. Or you can use them to pay down your loan more quickly.

When should you avoid refinancing a home loan

While there are many benefits to refinancing your loan, there are many times when it simply doesn’t make financial sense for you to refinance.

Cost of refinancing

Sometimes the costs involved in refinancing may be too high for it to be a smart move right now:

• If you’re on a fixed rate home loan for example, refinancing before your fixed term ends can mean you will pay break fees.
• The establishment costs of a new home loan may outweigh any savings to be made. Even if you are on a variable rate loan that won’t trigger any early termination fees, there might still be exit and application fees, as well as settlement fees.

Talk to your current lending institution and our team of refinance experts. They can help you determine the costs involved in refinancing in your specific circumstances.

Your equity in your property is low

If you have less than 20% equity in your home, it means you would be seeking to borrow at least 80% of your home’s market value. In this situation, you could be asked to pay Lenders’ Mortgage Insurance (LMI).

When your personal situation has made you a higher risk borrower

Sometimes changing jobs or having a child, can make you a higher risk candidate for a home loan. And this generally coincides with a higher interest rate or a lower potential borrowing amount. In those cases, it may be best to stick with the home loan that you currently have, as a new loan won’t bring you many (if any) benefits.

Is refinancing right for you?

So, when can you refinance a home loan? Well right now, if it’s right for you! Get in touch with us to help you work this out, for your own circumstances.

Talk to an expert

Our expert team is ready to do all the legwork involved in working out whether you are refinancing ready, and also which home loan product is right for you. Give us a call today at Lending Loop, and let’s see how we can help!