Home Loan Refinancing – The Ultimate Guide

Last Updated on Jan 4, 2022 by Stephen

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    How homeowners are saving $1000s per year simply with a simple refinance, and how you can make it happen too

    The ‘Great Australian Dream’ is to own your own home. Many of us do, well, along with the bank. Your mortgage could be a burden, or if you’re a little savvy, you could put it to good use. 

    How is this possible? For the right reasons, you should refinance your home loan, and the time is right to do that now.

    You’re about to discover what it means to refinance your mortgage. We’re going to tell you the top six reasons why you should do it, the costs involved, and the process. Finally, we’ve got answers to some commonly asked questions. Are you ready?

    What does it mean to refinance your home loan?

    Your biggest monthly expense is your home loan repayment. For whatever reason, your circumstances may have changed, and you might want to increase or decrease this amount. That’s where refinancing comes in.

    To refinance your home loan means to take out a new loan and pay out the existing one. There are a multitude of reasons to do this; let’s take a look at the most common:

    Why refinance your mortgage?

    With the lowest interest rates we’ve ever seen in the Australian property market, now is the ideal time to consider refinancing your mortgage. Six of the top reasons to do this are:

    • To get the best possible interest rate
    • Access equity for improvements or expansion
    • Consolidate debt to reduce monthly repayments
    • Switch your rate between fixed/variable
    • Find a better deal with more perks
    • Lengthen the period of your mortgage

    Let’s dig a little deeper.

    Adjust your interest rate

    The most common reason to refinance a home loan is to take advantage of reduced interest rates. While the current Covid-19 pandemic has been devastating, there are some benefits. Interest rates are statistically the lowest they’ve ever been.

    According to the Reserve Bank of Australia, the standard variable home loan rate has dropped almost 1.5% since before the pandemic. Making now the perfect time to refinance your mortgage and access these incredibly low rates.

    Access equity

    Despite the current worldwide economic downturn, the Australian property market is booming. Depending on your location, you could be sitting on a goldmine. Are you aware of the current value of your home?

    The equity in your home (the property’s value less the balance of your mortgage) could be high enough to allow you access to extra cash. Use this money for renovations, expansions, or improvements or even purchase an investment property.

    Consolidate debt

    It’s highly likely, like most Aussies, that your mortgage isn’t your only debt. Personal loans, overdrafts, and credit cards could mean your monthly repayments are considerably high.

    If you’ve managed to unlock some equity in your home (see above), you may want to consider folding some of your other loans into your mortgage. Paying one amount per month at the lowest possible rate makes it easier to take control of your finances.

    What you need to consider here is how long it will take to repay the mortgage. You’re effectively extending the life of your smaller loans, and in the long run, you may end up paying too much interest. 

    For those of you paying extra each month and attempting to cut years off your mortgage, this could be the right choice for you.

    Switch between variable and fixed rates

    Situations change for all of us. At the time of taking out your home loan, you may have opted to fix the rate. With the standard variable being considerably lower, you may be paying too much interest. 

    Alternatively, with rates this low, if you’d prefer the comfort of knowing exactly what you’re paying each money, fixing your rate could be the right move for you. Refinance your home loan today to save yourself money.

    Get better loan features

    Does your current mortgage come with any perks? Every lender now wants your business, and most are prepared to add some home loan refinance offers to sweeten the deal. 

    If your home loan doesn’t offer any of the following, and one or more appeals to you, the time is right to refinance your mortgage.

    Repayment holiday

    Things happen in life, and you sometimes need a break. Temporarily stop or lower your repayments without a penalty.

    Flexible rate options

    If you can’t decide between fixed or variable options, why not do both? Fix part of your mortgage and leave the rest at variable. You could even choose to pay interest only for a while if finances are tight.

    Redraw facility

    Maybe you’ve been making additional repayments, and now you need some urgent cash; a redraw facility gives you access to those excess funds.

    Loan portability

    Are you about to buy and move into a new home? With loan portability, you can take your home loan with you without the need for paying new set-up fees.

    Offset account

    If you have a variable rate, the interest payable is calculated on the balance of your loan. Link a transaction or savings account, and the balance in there is offset against your mortgage. This extra amount could save you considerable interest every month.

    Pay it off faster

    Are you in a position where you can make extra payments and cut years off your loan. Some lenders penalise you for doing this. Refinance your home loan to one who doesn’t to avoid these fees.

    Increase the life of the loan

    You may have a 25-year loan and need to lower your repayments. Some lenders now offer you the option of a 30-year loan. Refinancing allows you to extend the life of the loan, reducing your monthly commitment.

    By now, you’ve decided that for one or more of the reasons above, it’s time to refinance your home loan. Before you jump in, you need to be aware of the cost to refinance your mortgage. 

    What does it cost to refinance your mortgage?

    How much does it cost to refinance a home loan? There are a number of fees involved; plan carefully to ensure you’re not paying more than it’s worth for a home loan refinance in the first place. Typically the four charges to expect are:

    • Borrowing costs
    • Government fees
    • Lenders’ mortgage insurance
    • Exit fees

    Borrowing costs

    Naturally, there are often fees to establish a new loan; some may be negotiable or waived. The three most common are:

    Application fee

    Usually charged for new loans, lenders will often waive this fee to get your business; it never hurts to ask.

    Settlement fee

    To pay out your existing mortgage, your new lender may need to charge this additional processing fee.

    Valuer fee

    To get the up-to-date value of your home, your new lender may employ a third-party evaluator and pass this fee on to you.

    Government fees

    Government fees are almost impossible to avoid; there are two that you’ll most likely need to pay:

    Mortgage registration fee

    The Land Titles Office imposes this fee on both new and refinanced loans.

    Stamp duty

    You’ve already paid this on your original loan; any top-up amount is subject to this fee.

    Lenders mortgage insurance

    Lenders’ mortgage insurance (LMI) kicks in if you borrow over 80% of the value of your home. LMI protects the lender if you default on the loan.

    It’s not transferable from lender to lender, so you’ll have to pay it again. In some cases, LMI can be added to the loan amount if there’s enough equity (20%) in the property.

    Exit fees

    Some lenders include hefty exit fees in their loans to avoid you switching to a competitor. Check your mortgage contract to ensure the price to move doesn’t negate the benefits.

    Now that you know the costs involved, are you ready to find out how to refinance a home loan? Read on.

    How to refinance a home loan

    Your first step is to choose a lender. It makes sense to contact your existing one first to see if they can offer you a better deal. If not, shop around or use a comparison site. There are some excellent home loan refinance rates out there. After all, getting the lowest one possible is your goal here.

    The rest is straightforward, and the process is the same as when you took out the first loan. Make an appointment with your mortgage refinance broker, provide all the necessary documents, and be prepared to pay any fees. 

    What documents will you need?

    The same documents will be required that you provided for your initial home loan. They include 100 points of ID, your passport, and your driver’s license should be sufficient. Most importantly, you’ll need to show your current income details. Your employment contract, last two payslips, and most recent tax return and tax assessment notice are necessary. 

    It’s important to provide a complete record of other debts you currently have (e.g. credit card or loan statements). You’ll also need your latest council rates notice and evidence of building insurance you have on your property

    FAQs about mortgage refinance

    No doubt you’ve got more questions about mortgage refinance. Here are the five most commonly asked:

    How much equity do I need to refinance?

    You may be surprised to know that currently, you only need 5% equity in your home to consider refinancing. Remember, though, anything less than 20% will require you to pay or repay LMI, and this amount may be the difference between saving money on the home loan refinance or not.

    Does refinancing hurt your credit?

    Any new borrowings affect your credit rating. Depending on the additional amount borrowed, this may only be a small difference resulting in minimal impact. Keep in mind that every inquiry you make appears on your credit file. If you shop around numerous lenders, each of those ‘hits’ can reduce your rating.

    Will I automatically be approved?

    Another factor to consider when deciding to refinance your home loan is your ability to be approved. If your employment status has changed and you earn less income, there may be an issue in meeting the repayments—according to your lender’s criteria.

    During the period of your existing loan, if you’ve been late making repayments regularly, these appear as ‘black marks’ on your file and may be a stumbling block to getting approved.

    Mortgage refinance isn’t a guaranteed approval. Be as transparent as possible with your lender to avoid disappointment.

    How long should you wait to refinance a mortgage?

    When can you refinance a home loan? Technically there’s no “set time” you need to wait to refinance a mortgage in Australia. Some lenders do impose their own limits (from 120 to 180 days) if refinancing with them. It makes sense to wait at least 12-24 months to build up some more equity in your home.

    How do I know if my refinance makes sense?

    Once you weigh up the cost to switch, the general consensus is that if you can reduce your current interest rate by 1% or more, it’s worth it.

    It’s time to do a home loan checkup

    Should I refinance my home loan? Your mortgage is your biggest debt. You might have had the same one for a number of years; if so, it’s time to take a good look at it. If the interest rate is considerably higher than the current standard variable, then your loan is outdated. 

    Coming out the other side of the pandemic most likely means your circumstances have changed. You could be in a position to increase (or decrease) your repayments. This is the perfect opportunity to consider refinancing your home loan. 

    Take a look at our rate comparison site now to get the best option for your needs.

    5 years ago Stephen left Australia to semi-retire in Thailand. Now living by the sea he devotes his time to running marathons and writing/editing web articles. With over 30 years of experience in banking, finance, customer service, and travel he contributes regularly on a wide range of subjects.