GUIDES & RESOURCES

Refinancing Your Home Loan

Choosing a home loan can feel like a huge commitment, but did you know you’re not actually locked into the one you took out when you bought your home? The process of changing or renegotiating your home loan is called refinancing.
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What is home loan refinancing?

A lot can change in a few years. As markets shift, or as your own financial standing changes over the years, the home loan that was once a great option for you may no longer be advantageous. Put simply, refinancing is switching to a new home loan1.

You can refinance with your existing lender, but some people also end up changing lenders during the process.

What are the benefits of refinancing your home loan?

For some people, refinancing a home loan can be a smart financial decision. Let’s take a look at some of the potential pros of refinancing.

Lower interest rates

Switching to a mortgage with a lower interest rate could be a great reason to refinance. Interest rates will most likely change over the course of your home loan2. As interest rates routinely fluctuate, it’s smart to regularly compare your current rate with rates offered on new home loans. With interest rates currently at historical lows, now might be the time to see if you can get a more competitive interest rate.

See what interest rates your lender is offering to new customers. If the rates are lower, don’t be afraid to contact your lender and ask for a better rate.

Reducing your interest rate will likely lower your monthly minimum repayment amount, saving you money. Whether you have less income coming in each month,  saving for something else or want to pay off your loan sooner, this could be a big help. With a lower monthly repayment, you could also build equity in your home faster.

Shorten your loan term

With a lower interest rate, you might feel comfortable keeping your repayment amount the same and decreasing your loan term. By doing this, you could reduce the interest payable on the loan and own your property outright much sooner. When refinancing to a shorter loan term, be realistic about how much you can afford to pay on a monthly or fortnightly basis. You don’t want to find yourself struggling financially because your monthly repayment amount has increased.      

The faster you pay off your home loan, the less money you will have to pay in interest. So, if you can afford it, refinancing to a shorter loan term can be beneficial.

Convert your mortgage

Is your home loan a variable rate or fixed rate mortgage? Either way, it might not suit you now. A home loan with a variable interest rate fluctuates with the market. While interest rates are low, your variable rate will be low. If that rate increases over time, it may be worth looking at a fixed-rate mortgage.

On the flip side, if you’re locked into a fixed-rate mortgage with interest rates that were normal a few years ago but now seem high, a variable rate home loan could be a wise strategy. If you intend to refinance from a fixed rate home loan, you may be required to pay break costs if you refinance before the fixed period ends. It’s always key to check that the costs of refinancing won’t exceed the benefits.

Increase the value of your home

If you’ve been thinking about renovating your home, refinancing could be one way to pay for it. If those renovations increase the value of your home, it could pay off in the end. A home equity loan may be a way to access the cash you need to renovate.

Consolidate Debt

If you’re paying off multiple forms of debt, you may be able to use your home loan to consolidate your debt. This will allow you to combine your new home loan with your existing personal loan, car loan and credit card debt in one monthly payment. This is a great way to have better control of your finances and avoid missing repayments, but may mean you pay more interest in the long run. It’s important to consider which option is best for you before consolidating your debts into one loan.

Loan features

You might have the option to add a number of loan features to your home loan when refinancing. Loan features can help improve the home loan repayment process. For example, an offset account is a type of savings account that you can attach to your home loan. Any funds in this account offset the interest payable on your home loan.

For example, if you have a $100,000 loan balance with $20,000 in your offset account, the interest is calculated on $80,000. You can access your offset funds at any time. A redraw facility is a similar option, but any funds in it actually reduce your loan amount.

When would I refinance?

There are a few circumstances that might prompt you to look into refinancing your mortgage. For example, if the value of your home has increased, you might be eligible for rates or discounts that weren’t a possibility when you were first looking. Similarly, you might qualify for a different type of home loan if your own financial situation has changed significantly.

You should consider refinancing when you feel that your current home no longer suits your needs, or when there are more competitive interest rates out there. Things can change quickly, so it makes sense to regularly assess and compare your home loan.

Your home loan should align with your lifestyle and finances. For example, if your income has increased substantially, you may want to increase your monthly repayments so you can pay off your loan faster. The opposite applies to homeowners experiencing a loss in income.

Some people may also refinance their home to draw funds from its existing equity in order to cover large expenses, such as a new car, holiday, renovations or investment property. Refinancing can also be a way to get money in a financial emergency. But before you redraw funds from your home loan, it’s important to consider some of the potential drawbacks.

So, what are the potential risks of refinancing?

While refinancing can be a smart move for many homeowners, you might want to consider the potential downsides. We can’t give you financial advice, but we can share some of the common reasons people decide not to refinance.

Cost

Refinancing could save you money in the long run, but it can come with some fees initially. And since you’re getting a new mortgage, you might also be asked to pay fees for property valuation, title search, and application fees.

When refinancing from a fixed rate loan, break costs may arise. Homeowners who got their loan prior to 1 July 2011 may also be required to pay exit fees. In most cases, refinancing should save you money in the long-term. Work out which fees could be involved to find out if refinancing will be worth it for you.

Lender’s Mortgage Insurance

If you’ve already had to pay Lender's Mortgage Insurance (LMI), you might be hoping you’d never see these words again. But, depending on the nature of your new loan, you might be asked to pay this upfront fee again. You will likely have to pay LMI if you have less than 20% equity in your property.

Can I refinance to buy an investment property?

We’ve already mentioned how refinancing can be a way to draw funds from your equity to pay for some of life’s big expenses. It can also be a way to fund the purchase of an investment property3. Normally when buying a home, you’d be asked to put down a deposit and, if that deposit is less than 20%, you may also have to pay Lender’s Mortgage Insurance. But, by refinancing your existing home, you may be able to access funds from your equity to cover the deposit for a new property.      

Generally, lenders may let you borrow up to 80% of the value of your current home, or even more with the addition of LMI4.

If appropriate, you can also switch between an owner-occupied home loan and an investment home loan when refinancing. Interest rates associated with owner-occupied loans are usually lower, but investment property home loans can come with tax benefits.

What does the typical refinancing process look like?

If you’re thinking about refinancing, these are some of the typical steps you should expect to go through:

Explore the costs

Before you break up with your old home loan, it’s a good idea to ask what exit fees they’ll charge. Exit fees can only be charged on loans entered into prior to 1 July 2011. However, other fees, like break costs may arise. And like we outlined above, it’s a good idea to factor the costs associated with your new contract as well.

Make a checklist

Every home loan is different, so before you start looking it might help to make a list of what you’re looking for. For example, if you’re looking to reduce your interest rate, you might put that at the top of your “shopping list”.

Compare your options

This is where we come in. If you want to get a good deal, you’ll want to shop around a bit. At iSelect, we’ve partnered with Lendi to make it easier for you to compare different home loans*. Click here to compare home loans for free today! Lendi works with over 35 different Australian lenders, so you have countless home loan options to consider.

Get Approval Confidence™

Approval Confidence is Lendi’s quick and easy way of finding out the likelihood of you being approved for a home loan. Instead of waiting weeks for a formal pre-approval, Lendi’s smart software integrates with a number of major Aussie lenders to help you get approved faster.

Apply

Once you’ve picked the new home loan that suits you, you’ll need to start the application process. When you refinance with our partner Lendi, the application process happens entirely online. Lendi’s Home Loan Specialists will be on hand to guide you through the process and answer any of your questions.      

Lendi’s online application platform makes it easy for you to organise and submit your documents entirely online. You can refinance from the comfort of your own home!

Let your current lender know

If you’re switching lenders, you’ll need to let your current one know, and pay any exit fees. Lendi can help with this step and work out what your refinancing costs might look like before you get started.

Valuation

As part of your application, your property will be valued by your new lender. Generally, your first evaluation will be free.

Finance approval

Once your new lender knows the value of your property, you’ll be issued what’s known as formal or unconditional financial review, and it generally comes just before your new loan is made legal.

Legal approval

If you’ve hired a solicitor, they’ll review the documents and then you’ll sign them. Some people also choose to review the forms themselves. Once you’ve signed the paperwork, the contract becomes legally binding.

Arranging settlement

Once the forms have been signed, your new lender will settle your old loan and establish your new one.

Pop champagne!

Or however you prefer to celebrate your new home loan. You should receive all of the info for your new loan and be able to access the details typically within a week.

Compare refinancing options with iSelect and Lendi

No matter the reason you’re refinancing your home loan, comparing your options is an important step. We can help! At iSelect we’ve partnered with Lendi to help you compare home loans from their range of providers. Get started today by comparing online, or call the team on 13 19 20.

Sources:
1. https://moneysmart.gov.au/home-loans/switching-home-loans
2. https://moneysmart.gov.au/glossary/interest-rate
3. https://moneysmart.gov.au/property-investment
4. https://moneysmart.gov.au/saving/save-for-a-house-deposit


Last updated: 5/10/2020
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