Home Loan Refinancing

Refinancing involves switching your home loan from one lender to another and signing up to a new home loan that better meets your requirements. Around 25% of all new home loans each year are refinancing loans with borrowers switching to acquire lower rates, longer loan terms or access to features their current home loan does not offer. The number one reason to refinance remains the securing of a lower interest rate that delivers savings on your repayments, and potentially reduces the life of your home loan.

Top 8 reasons to Refinance your Home Loan

  1. Reduce interest rates: The number one reason to refinance remains the securing of a lower interest rate that delivers savings on your repayments, and potentially reduces the life of your home loan.

 

  1. Lower repayments: If you are finding hard to meet your home loan repayments refinancing provides the opportunity to restructure your home loan so that the terms of your loan and payment cycle are more in synch with your financial circumstances. 

 

  1. Switching to a fixed rate home loan: When interest rates are experiencing frequent changes it can be hard to manage the fluctuations in your home loan repayments. By refinancing your home loan to a fixed rate loan your repayments become set and predictable and so easier to manage against your income levels.

 

  1. More flexibility: Once you are through the early years of repaying your home loan you may require greater flexibility from your mortgage derived from features such as flexible repayments, redraw facilities, offset accounts and account splitting, each of which can help you get better value from your home loan provider.

 

  1. Debt consolidation: When you refinance a mortgage, you also have the option to consolidate all your debt, including personal loans, store cards and credit cards into a single monthly payment. The interest rate on a home loan is generally significantly lower that the rates on other types of credit such as credit cards and personal loans, consequently consolidating your debt into your home loan can cut your interest charges. Consolidating debts into your home loan often means you are turning a short-term debt, like a personal loan, into a long term debt, which can mean that if you do not pay off your mortgage quickly, the consolidation could result in you paying more interest in the long term. To avoid this you should seek to make extra repayments to your home loan which will help deliver the aforementioned savings in interest charges.

 

  1. Tax Benefit: Refinancing your home loan may offer potential tax benefits, if you refinance to access equity in your home and then use the released funds to invest in property, shares or other wealth-building opportunities.

 

  1. Home Renovation: Home Loan Refinancing can enable you to use the equity in your home to renovate

 

  1. Releasing the Equity you have in your home: If you have built a significant amount of equity in your home you may have the option to access this equity as a line of credit, via an equity line home loan. This type of loan allows you to purchase other properties or assets, such as funding a renovation for your home or purchasing a new car. So for example if your home is valued at $850,000 and you have $300,000 remaining to pay on your home loan, the equity you have in your home is $550,000, which is the amount you are able to access through an equity line home loan.

 

How to refinance your home loan

Switching lenders to refinance your home loan is now a relatively simple process that we have broken down into 5 steps:

1. Determine what you want from your home loan

Being clear about what your motivation to refinance your home loan is will help enormously in the selection of the best home loan for your circumstances and needs.  Are you seeking a lower interest rate, better features or more flexibility? Are you interested in accessing the equity in your home to renovate or buy an investment property?

Confirming the home loan features that are important to you will help you compare the home loan refinancing options and assist in the process of finding the one that best suits your needs.

2. Compare the loan refinancing options

Your comparison should include consideration of:

  • The interest rate
  • Any Introductory offer Interest Rate
  • All the Upfront Fees
  • Any on going Fees
  • Flexibility from features such as redraw and offset accounts

3. Calculate the costs associated with refinancing your home loan

Having selected a shortlist of home loans that meet your refinancing needs it is now time to calculate the costs of making the loan switch to a new lender. The costs in making the switch may include some upfront and ongoing costs such as exit and break fees, start-up fees, new loan establishment fee, settlement fees and government fees and charges. The most common fees are:

Loan Application Fee - This is charged by the lender to cover administration and loan set up costs, it is generally charged at the time your home loan settles and tends to be in the range of $200 - $500.

Valuation Fee - The lender to whom you are switching your home loan to will charge this fee to cover the cost of having your property independently valued, this will cost in the range of $100-$400.

Settlement Fee - This fee covers your lenders cost associated with paying out your current mortgage, settlement fees range between $100-300.

Lenders Mortgage Insurance (LMI) - If your new home loan is for more than 80% of your property’s value you will generally be asked by your lender to pay LMI. This insurance is designed to protect the lender should you fail to meet your home loan repayments. LMI is charged as a one off premium, the size of which is determined by the size of your home loan and the % of equity you currently have in your property. The premium can be several thousand dollars, which can be added to your home loan, though this will mean you will paying interest on the premium.

Exit Fees or early Repayment Fees - Your current lender may charge a one off fee the size of which vary significantly by lenders. These exit fees where banned by government legislation in 2011, and so for all home loans taken out post July 2011 no exit fee will be charged.

4. Apply for your new home loan

Applications can be made online, in a branch, with a mobile lender or over the phone. The application process is much the same as you will have gone through when you applied for your current home loan. The lender will generally look to assess lending criteria such as income, your mortgage repayment history, any other loans and financial commitments. The documents that you will need to complete your application will include:

  • Proof of Income - Salary Slips or your latest tax return generally cover this
  • Current loans - Statements for the last 6 months of any existing home or personal loans
  • Rates Notice - The most recent copy of this
  • Building Insurance Policy - Your current policy document
  • Drivers license or Passport - which will be used to validate your ID

The lender may also complete a property valuation to establish the value of your current home. If your application is approved, you’ll receive a letter of offer and contract for the new home loan from the lender. You should talk to your solicitor and read through the contract carefully before signing.

5. Settlement of your new home loan

Once you’ve signed the contract for your new home loan, settlement occurs and your new home loan is drawn down. This involves paying off your current home loan using the funds from your new loan.

Your lender will also submit a ‘Discharge of Mortgage’ form to the Land Titles Office in your state or territory to close the old home loan account. You can now focus on making mortgage repayments on your new home loan.  The first repayment on your new loan is usually due within a month of settlement, depending on the conditions of your home loan contract.

Frequently Asked Questions

Should I consolidate my credit card or other debts into my home loan when refinancing?

You should always seek the advice of an accountant or financial advisor before considering refinancing and adding in other debts to your home loan. While it may seem like a good idea to roll other high interest debts into your home loan and pay a lower interest rate, you should be aware that these debts will take much longer to pay off because a home loan is generally taken over much longer periods of time. This means what was a small debt could become much larger due to the interest charges being applied to the debt for an extended period of time.