A home loan is a significant financial commitment and one that many Australians take on in order to purchase a property. However, as circumstances change and market conditions fluctuate, it may make sense for a borrower to consider refinancing their home loan.

But what is the economic backdrop that puts a strong case for mortgage refinancing?

In the present-day context, Inflation is much high and well above the RBAs targeted rate of 2-3%. The arrest and tapering down of such a soaring inflation demands the RBA to hike the cash rate (Inter-bank lending rate). This therefore, has a cascading effect on the Prime lending rate that banks charge you as their borrower. Lower the Cash Rate, lower the Prime Rate and lower the Interest you will pay your bank in general.

The present RBA Cash Rate is at 3.10%. RBA is expected to continue the series of hikes at-least for a year more to keep the inflation rate from soaring.

At a time when the economy anticipates a series of hikes to the Cash Rate, it makes sense for the borrower to lock in the current pre-hike rate, especially if the fixed rate tenure of their existing mortgage is expiring and getting converted to a variable one. If they continue with the Variable conversion, which is an agreed condition at the time of borrowing the loan, they would be subject to pay interests at higher rates and therefore would have higher monthly debt service.

With Refinancing, the borrowers get out of the loan with their existing lender, take a mortgage loan from a new lender, who is willing to provide a fixed rate loan for a specified period at the present pre-hike rate and insulate the borrower’s pockets against any rate hikes in near future.

While being in the new refinanced loan, if the borrower anticipates the RBA to reduce Cash Rates, that translates to lower prime rates at that time. So to get out of the existing higher interest rate, the borrower further refinances the mortgage again to the lower prevailing interest rate.

Another reason to refinance is to change the loan term. For example, if a borrower has a 30-year loan and they have been making extra payments to pay off the loan faster, they may want to refinance to a 15-year loan to take advantage of the lower interest rate that a shorter loan term typically offers.

Borrowers may also want to refinance in order to access cash equity they’ve built up in their home. This can be used for home improvements, to pay off other debts, or to make a significant purchase. This is known as cash-out refinancing.

For example, John has a home loan of $500,000 and after 5 years of making regular payments, he has built up $150,000 in equity. He can refinance his loan to $650,000 to access the equity and use it for home renovation.

In summary, home loan borrowers in Australia should consider refinancing if they are looking to secure a lower interest rate, change the loan term, access cash equity or change from an adjustable-rate mortgage to a fixed-rate mortgage.

                                                                                           A smart man’s world is one where he can see

                                                                                          The opportunities that lie ahead.

                                                                                          He knows when to move and when to stay

                                                                                          To make his dreams come true, he’s not led.

                                                                                           He looks beyond the present, to what’s ahead

                                                                                           And takes control of his own fate.

                                                                                          He knows the value of a dollar, and a penny

                                                                                           And how to make them both accumulate.

                                                                                             If you want to be a smart man,

                                                                                            Study the scenario and take a stand.

                                                                                            Refinance your home, and make it your own

                                                                                            And watch your wealth and happiness expand.