Refinancing your home loan can be an excellent way to adjust your mortgage to better suit your financial situation. Whether you’re aiming for a lower interest rate, accessing home equity, or modifying your loan features, refinancing can offer significant benefits. But how often should you refinance? Is it worth refinancing every time there’s a better deal on the market? Let’s explore this in detail.
What is Refinancing?
Refinancing your home loan involves replacing your existing mortgage with a new one, often with a different lender or loan structure. Homeowners typically refinance to:
- Secure a better interest rate
- Change the loan term (e.g., to pay off the mortgage faster)
- Tap into home equity for purposes like renovations or large expenses
- Consolidate debt into the home loan
- Modify loan features (e.g., switching from a variable to a fixed-rate loan)
While refinancing can be an advantageous move, it’s important to consider when it makes the most sense for your situation.
How Often Can You Refinance?
There are no strict rules on how often you can refinance your home loan. Technically, you can refinance as many times as you like—provided you meet your lender’s criteria, including credit score, income, and other financial factors.
However, refinancing too frequently might not always be beneficial. Each time you refinance, you may incur additional costs that could outweigh the benefits. So, it’s crucial to weigh the pros and cons before making the decision.
Why Should You Refinance?
There are several compelling reasons why homeowners choose to refinance. Here are some of the most common scenarios when refinancing makes sense:
1. To Secure a Lower Interest Rate
One of the most common reasons for refinancing is to obtain a lower interest rate. Even a small reduction in your rate can result in significant savings over the life of your loan. This is particularly beneficial if interest rates have dropped since you first took out your mortgage.
2. To Change the Loan Term
You may want to adjust the term of your loan to either pay it off quicker or reduce monthly payments. Extending the term can lower monthly repayments, while shortening it can help you save on interest in the long run.
3. To Access Home Equity
If your property has increased in value or you’ve paid down a significant portion of your mortgage, you may have built up equity. Refinancing can allow you to access this equity, which can be used for home renovations, debt consolidation, or even purchasing another property.
4. To Consolidate Debt
Refinancing provides the opportunity to roll multiple debts (such as credit card balances or personal loans) into your mortgage, potentially at a lower interest rate. This simplifies your repayments and may reduce overall interest costs.
5. To Switch Loan Features
If your current mortgage doesn’t suit your needs, refinancing gives you the option to switch loan products. For example, you can switch from an interest-only loan to an owner-occupier loan, or from a variable rate to a fixed-rate loan.
6. To Improve Loan Features
Refinancing can also help you access new loan features, like offset accounts, fee waivers, or more flexible repayment options.
Key Considerations Before Refinancing
While refinancing can offer multiple benefits, there are several factors you need to take into account before making the switch:
1. Refinancing Costs
Refinancing comes with its own set of fees. These may include application fees, discharge fees, establishment fees for a new loan, and, if you’re breaking a fixed-rate mortgage, break fees. Depending on the lender and the complexity of your situation, refinancing costs can range from a few hundred dollars to several thousand dollars.
It’s crucial to calculate whether the potential savings from refinancing outweigh these upfront costs.
2. Home Equity
If you have less than 20% equity in your home, you may need to pay Lenders Mortgage Insurance (LMI) when refinancing. If you already paid LMI on your original loan, you may have to pay it again when refinancing. This can add to the cost of refinancing.
On the other hand, if you have more than 20% equity, you may be able to access more competitive rates and terms, potentially saving you money in the long term.
3. Credit Score
When you refinance, your new lender will likely perform a credit check, which could temporarily lower your credit score. If you refinance too frequently or apply for refinancing with multiple lenders, these “hard inquiries” can affect your credit rating. A lower score could result in less favorable terms or even make it harder to refinance in the future.
4. Lender Policies
Some lenders may impose a waiting period before allowing you to refinance. This is particularly relevant if you’re looking to refinance soon after initially setting up your mortgage. Be sure to check your current lender’s policies before making any moves.
5. Financial Goals and Circumstances
Before refinancing, take a close look at your long-term financial goals. For example, if you plan on selling your home within the next couple of years, refinancing may not be worth the costs, as the savings won’t be realized in the short term. Similarly, if your financial situation has changed (e.g., job loss, increased debt), refinancing may not be the best move.
How to Know If Refinancing is Right for You
To determine whether refinancing is the right option, consider the following steps:
- Review Your Interest Rate: Keep an eye on market interest rates. Every 12 to 18 months, check if your current rate is still competitive. If it’s not, refinancing may help you save money.
- Compare Loan Features: Look for loans that better match your financial goals, whether it’s lower interest rates, better repayment options, or more flexible terms.
- Calculate Costs: Make sure to account for refinancing costs and determine whether the potential savings outweigh the expenses.
Conclusion: How Often Should You Refinance?
While there’s no limit to how often you can refinance your home loan, it’s important to approach refinancing strategically. Don’t refinance just for the sake of getting a slightly lower rate. Instead, ensure that the benefits outweigh the costs and that the move aligns with your long-term financial objectives.
In most cases, refinancing every 12 to 18 months is a good rule of thumb to ensure you’re staying on top of market changes and taking advantage of competitive rates.
If you’re considering refinancing, it’s also a good idea to speak with a mortgage broker or financial advisor who can help guide you through the process based on your unique circumstances.