When Is It Not a Good Time to Refinance?

Our top 5 2024 tips for accessing if it’s best to ‘stay put’ with your current home loan.

Refinancing a home loan can be a smart financial move in certain situations, offering potential benefits such as lower interest rates and improved loan terms. However, there are circumstances when refinancing may not be advantageous or appropriate.

1) The Early bird on Aussie mortgages.
Refinancing early in the life of a loan may not be financially beneficial. In the initial years, a significant portion of the mortgage repayments typically goes towards interest, and the principal balance may not have decreased significantly. Refinancing too early can result in resetting the loan term and extending the overall repayment period, potentially outweighing any potential savings from lower interest rates.

2) High Break Costs.
If you have a fixed-rate loan and decide to refinance before the fixed-rate period ends, you may incur break costs. These costs are fees charged by the lender for terminating the loan early and can offset any potential savings from refinancing. It is crucial to carefully consider the break costs and compare them against the potential benefits of refinancing before making a decision.
It can be very costly for newly established loans with long loan terms and a long fixed rate period to be ‘broken’. The banks will usually pass off their losses for breaking the fixed term early.
Look at it this way, if you fixed your loan for $500,000 at 6% pa for 4 years, and the variable rate was at 3% pa, the bank would have missed out on 4 years of interest at 3% pa.

3) A little bit weak.
If your creditworthiness has declined since obtaining your current loan, refinancing may not be advisable. Lenders assess credit history and financial standing when considering refinancing applications. If your credit score has significantly decreased or your financial situation has deteriorated, you may struggle to secure a new loan with favourable terms or interest rates.

4) In the Short-Term.
If you plan to sell your property in the near future, refinancing may not be worthwhile – this is especially true if you are thinking about fixing your loan. As mentioned above, this can prove to be quite a costly mistake. The costs associated with refinancing, such as application fees, valuation fees, and legal fees, can erode any potential savings. Consider the break-even point—the time it takes for the savings from refinancing to surpass the costs incurred. If you are unlikely to recoup the costs before selling, it may not be a good time to refinance.

5) Limited Equity.
Insufficient equity in your property or a low property value can hinder your refinancing options. Lenders typically require a certain level of equity or a loan-to-value ratio (LVR) to approve a refinance. If the value of your property has decreased or you have minimal equity, it may be challenging to secure a beneficial refinance deal or access competitive interest rates.

How’s the Australian property market faring?
Refinancing decisions can be influenced by prevailing market conditions. If interest rates are expected to rise or the Aussie housing market is experiencing a downturn, it may not be the right time to refinance. Waiting for more positive market conditions can potentially result in better loan options and interest rates in the future.

Before deciding to refinance, carefully evaluate the potential benefits and savings. Calculate the potential monthly savings on repayments, compare interest rates, and consider the overall financial impact. If the potential benefits are minimal and do not outweigh the costs and effort associated with refinancing, it may be best to postpone the decision. Seeking advice from mortgage professionals can provide valuable insights and assist in determining whether refinancing is the right choice at a given time.