What Is Refinancing and How Do I Refinance My Home Loan?

Interest rates are on the rise in Australia. And if you're a homeowner, you may be feeling the pinch as your mortgage repayments start to increase too.

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Home Ownership
by
Dawn Teh

Interest rates are on the rise in Australia. And if you're a homeowner, you may be feeling the pinch as your mortgage repayments start to increase too. 

However, by refinancing and shopping around for a better deal, it's possible to save thousands of dollars in interest payments across the life of your loan.

Many other Aussies are already making this move.  

The Australian Financial Review reports that $14b worth of home loans have moved to a new lender in August 2022. 

That's a 20% jump compared to the same time last year.   

However, don't forget that refinancing also comes with many fees. And when you add it all up,  it might not be worthwhile hopping over to a new loan even if the interest rates are lower. 

So keep reading to find out all you need to know about refinancing and what tricky fees you need to be aware of before you sign on the dotted line!

Disclaimer: This article is intended to be general in nature and is not personal financial product advice. It does not take into account your objectives, financial situation, or needs. In particular, you should seek independent financial advice and read the relevant product disclosure statement (PDS) or other offer documents before making an investment decision in relation to a financial product (including a decision about whether to acquire or continue to hold).

What is refinancing a home loan?

Refinancing simply means taking out a new loan with more favourable terms and using it to pay off your current mortgage. 

You can use it as a way to save money on your monthly payments, reduce how much you'll pay in interest, or shorten the length of your loan.

While it does involve some effort to refinance your current home loan, it can be well worth it in the long run. But you'll need to look closely at the individual terms. 

What is the purpose of refinancing?

There are many reasons why borrowers refinance their home loans. Here are some of the more common ones:

  • To access a different loan type or better interest rates.
  • Change the terms of your loan from a variable to fixed rate home loan (or the other way round).
  • Access other loan features like flexible repayments or an offset account. 
  • Use the equity in your home for other purposes, such as buying an investment property or doing renovations.
  • Debt consolidation (like from your other credit card, personal loans, or car loans) into a single monthly repayment. 

What are the benefits and drawbacks of refinancing a home loan?

Whether getting a new mortgage is good or bad for you basically comes down to 2 things: Your overall goals and the costs associated with refinancing.  

One of the benefits of refinancing is that it could allow you to lock in a lower interest rate or shorten the term of your loan. 

This may help you to achieve your goals of saving more money or being debt-free faster. 

However, it's important to remember that refinancing comes with some costs, including closing costs and appraisal fees. 

As a result, it's important to make sure that the savings from refinancing will be greater than the costs of refinancing before you make the decision to refinance. 

If you're not sure whether refinancing is right for you, talk to an independent financial advisor about your options. They can help you to figure out whether refinancing will save you money in the long run.

How does refinancing a home loan work?

The refinancing process is pretty similar to the home-buying process. 

And just like the last time, it's important to do your research and shop around to discover your loan options before making a decision. 

Here is a step-by-step guide to help you refinance your home loan:

1. Determine why you want to refinance

Are you looking to lower your interest rate, shorten the term of your existing loan, or cash out some equity? 

Knowing your goal will help you narrow down your options.

2. Compare multiple lenders

The key things to examine are:

  • Interest rates — Do they offer fixed interest rate or variable rate home loans? Is what they're offering in line with your goals? Fixed rates give you more certainty, but variable rates allow you to take advantage of interest rate dips. 
  • Loan term — What will be the length of your new loan? Remember that while your interest rate may be lower, you may still be paying more if your loan term is extended. Take some time to do the long-term calculations.  
  • Exact monthly repayments. This will depend on the type of loan repayment you and your lender agree on as well. Will it be interest-only or principal plus interest?
  • Comparison rate — The comparison rate helps you understand the real cost of the loan with other costs added in like fees and charges. This makes it easier to compare loans.  
  • Loan features — What kind of features will you need? Consider things like offset accounts, extra repayments, and redraw facilities.

Fees and other charges associated with each loan (scrutinize this closely as this is where things add up!) — Service, valuation, settlement fees, and more. They may be one-off upfront or ongoing fees.

Key refinancing fee terms:

  • Establishment or application fees: An establishment fee in refinancing is a charge assessed by a lender to set up a new loan. 
  • Valuation fees: This is the fee for the lender to conduct a valuation of the property. 
  • Exit fees (settlement, termination, and discharge fees or break costs): There are many different types of fees a lender may charge when a borrower terminates a loan agreement before the scheduled maturity date. It's sometimes a percentage of the current loan balance. 
  • Admin and service fees: These are usually fees you pay on an ongoing basis to the lender.

3. Apply for refinancing

If you're refinancing with an existing lender, the application process can be pretty easy as they'll already have most of your documentation. 

But if you decide to move to a different lender, here are the typical documents you'll need to provide when applying for a new home loan:

  • Personal information (e.g. ID and proof of address).
  • Family situation.
  • Current financial situation — this includes information like your payslips, credit score, other assets or liabilities, and bank statements.

Note that various lenders will have different eligibility criteria for refinancing. 

4. Get approval 

Once you’ve submitted your loan application for refinancing, your new or current lender will assess your current financial situation to determine if you're eligible.

Most likely, your lender will also want to do a valuation of your property to determine how much you can currently borrow. 

This is also because the value of your property might have changed from when you bought it. 

Note that you might have to pay lenders mortgage insurance (LMI) if your loan-to-value ratio (LVR) is more than 80%. Your LVR is calculated by taking your loan amount and dividing it by your property value.

Loans with an LVR of more than 80% are typically considered riskier to the lender. This is why the borrower will need to pay LMI (a type of insurance that protects lenders against loss if a borrower defaults on their mortgage).

5. Arrange settlement

Once you have approval, your lender will send the loan documents to your solicitor for you to sign. 

The lender will then arrange for the settlement of your new loan. 

The outstanding balance on your old loan will be paid out by your lender and the new loan will be put in place. 

They will also arrange for the previous lender's name to be removed from the mortgage (if applicable). 

Once settlement is complete, you will start making repayments on your new loan. 

At this point, it's important to check that all your account information and whether the agreed loan features (e.g. offset account) are in place. 

How long does refinancing take?

Depending on the complexity of your loan, refinancing could take between a few days to a month. 

To speed up the process, ensure that you submit all the necessary documents to prevent delays.

The lowdown: Should you refinance your mortgage?

Whether you should refinance now really depends on the current interest rates and whether you can get a better deal than what you're currently paying. 

If interest rates have dropped since you first took out your loan, you might be able to save money by refinancing at a lower rate. 

Or, if you originally got a variable-rate mortgage, you may now be able to lock in a fixed rate. 

You may also be able to refinance for a longer term, which could lower your monthly payments. 

Of course, there are also some potential drawbacks to refinancing. For one thing, it can be costly – you may have to pay closing costs and other fees. 

And, if you extend the term of your loan, you could end up paying more interest over the whole life of the loan. 

So, it’s important to weigh all the potential benefits and risks before making a decision. 

The general rule is that you should consider it if you can recover the costs of refinancing within 1 year. For interest rates, you should also try to get at least a 0.75-0.80% reduction in interest rates on your new loan. 

When in doubt, speak to an independent financial advisor before making any decisions about refinancing.

FAQs: Refinancing your home loan

Do interest rate rises affect my ability to refinance?

Interest rate rises don't directly affect one's eligibility to refinance. 

What lenders look for when approving refinancing applications are things like the value of the property, your current financial position, and your credit score.  

If the value of the property has decreased or if you've got a low credit score, it might be more difficult for you to get approval. 

They'll also want to see that you've got a steady income and a history of making timely payments. 

How much equity do I need to refinance? 

You generally need 20% equity in your property to refinance your mortgage.

Can I refinance my home with the same bank? 

Yes! You can speak to your existing lender first to explore refinancing options. However, keep in mind that you might get a better rate elsewhere. 

Just like you did with your first home loan, it's always a good idea to compare rates from multiple lenders before making a decision. 

How does refinance cashback work?

Cashback rewards or deals are a way that lenders incentivise refinancing with them. 

In short, the lender basically offers you a cash rebate if you refinance with them. But it can also come in the form of gift cards or reduced fees. 

It's not uncommon for cashback values to be worth a few thousand dollars.

Although cashback is enticing, always remember to look beyond the incentive when evaluating whether your new loan terms are favourable to you. 

Think about more crucial factors like the interest rates and whether it offers the home loan features that you need. 

Do you need a valuation to refinance?

Yes, your lender will conduct their own valuation before approving your new home loan. 

Sometimes this may be done as a desktop valuation where it's based on current online data. Kerbside valuations are done by valuers who take a look at the property from the outside. A full valuation is when valuers go into the home and do a thorough inspection.  

Why is it so hard to refinance my loan?

There are a number of reasons why your refinancing application might be denied. Some common ones include:

  • Your credit score isn't high enough. Lenders want to see a strong credit history before they'll approve a loan. If your score isn't where it needs to be, you may need to wait a little longer before you can refinance.
  • You don't have enough equity in your home. In order to approve a refinance, lenders will typically require that you have at least 20% equity in your home. If you don't, you may need to wait until you've built up more equity or consider a different type of loan.
  • Your home value has decreased. The lender needs to ensure that they will be able to recover the debt through the sale of your property if you're unable to repay it. If your property value is too low, it's too risky for the lender to approve your application. 
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