As a homeowner, your needs and financial situation are always subject to change. No home buyer will ever be in the same circumstances as when they first signed up for a home loan.
That’s why refinancing is a crucial step in the home buying process that can help you take charge of your home loan. Though it may seem like a hassle or not worth the extra effort, refinancing is one way home buyers can leverage their loans to adapt to their current financial situation.
In layman’s terms, refinancing is the process of trading in your current home loan for a new one with either another bank or your existing lender. It’s important to know exactly what you need from your new home loan to refinance with the most favourable terms.
“Why refinance?” is a common question posed by many people with a home loan, especially first home buyers who are weighing up their options. The truth is, there are many reasons why refinancing may improve your financial situation, but it’s essential to familiarise yourself with the different options and benefits available to you.
By refinancing your home loan, you could:
Refinancing your home loan is straightforward as long as the application is completed in time and contains no discrepancies.
Often, refinancing can be easier than obtaining your first home loan, as there aren’t as many hoops you need to jump through. This is because your new lender may assume responsibility for part or all of the application process.
The only real difficulty is ensuring you choose the right refinance for your circumstances.
The process of refinancing your home loan can be broken down into 8 steps:
Before you even begin to check comparison rates and loan features, it’s vital that you get clear on why you’re refinancing.
Nailing down your needs from the beginning will make it easier for you to identify your desired outcome and help you assess various loan products available to find the one ideal for your financial situation.
For instance, if you want to reduce the overall cost of the home loan, you should be looking to minimise interest. On the other hand, if you are looking to refinance an investment property, you might be looking to make offset account accessibility a priority or cash-out refinance to maximise your negative gearing potential. Check out our guide for more information on when is the best time to refinance.
Knowing exactly why you want to refinance will make the research process much easier and speed up the comparison process.
In addition to assessing the costs of breaking your home loan agreement early, you should also take some time to review your home loan and financial circumstances, as this will affect your eligibility to refinance your home loan.
Some factors that could affect your refinancing application, positively or otherwise, are your current credit report, outstanding debts, and changes in your income since signing your home loan.
Since refinancing is essentially like taking a new loan, the new lender will assess you with their own set of eligibility criteria for their loan.
Most importantly, however, you need to figure out how much equity you currently have in your property. Simply put, your equity is the percentage of your home that has been paid off or the difference between your property value and the mortgage balance remaining on the home.
When refinancing, you’ll want to ensure that you already have at least 20% equity in the property. This is because equity below 20% will incur exorbitant mortgage insurance (LMI) premiums that can cost tens of thousands of dollars.
If you’re only considering refinancing for the first time, it’s common to overlook some of the underlying costs you should be aware of. In another sense, it may be counterintuitive since refinancing costs may outweigh the potential savings.
To understand whether the refinancing process will be worth your time and effort, make sure you read up on the terms and conditions of your current mortgage.
For instance, refinancing when you are still within the fixed period of a fixed-rate loan will incur significant break costs on top of the standard exit fees.
Sometimes, lenders will charge legal and application fees (no matter the loan type), so it’s important to read the fine print of your lender.
By researching the housing market and the loan products on offer, you will have enough information to decide which home loan is best for you.
Once you have nailed down your intentions for refinancing and worked out your finances, you’ll have a better idea of which features and structures are best suited to your needs.
Depending on your needs, you should prioritise and list which loan features, structures, and types are most important to you.
Once you have eliminated a few options and are left with a handful of loans with favourable terms and features, check the comparison rates and filter through each.
Comparison rates are standardised by the ASIC and can be a great tool to help you understand a home loan’s true cost and value. The comparison rate is a combined reflection of the interest rate, other fees, and charges relevant to the particular loan.
Remember that a lower interest rate is not always better if it is stringent on bad repayment frequencies or unfair obligations. The best deal is always the one with the ideal combination of all factors.
Joust offers the most comprehensive and accessible way to compare home loans for your exact financial needs directly. By providing a platform for lenders to compete for your home loan, we have created a unique method of uncovering the most competitive rates for first-time home owners and property investors.
Before you send away your refinancing application, it’s well worth checking with your current lender to see if they can improve the conditions of your existing home loan.
Lenders are usually determined to keep borrowers on their books, so if you have been a low-risk borrower (i.e. timely principal and interest repayments, high equity, etc.), they will likely try and negotiate a better deal with you.
This is usually the most commonly neglected step in refinancing since most people are unaware of this option. However, renegotiating your mortgage with your current lender can save you a lot of time and, in some cases, more money.
We recommend that you take your preferred loan product, comparison rates or a quote with you to your current lender to have some bargaining power when negotiating a new loan.
After you take these preliminary steps, you should start organising your documents for the application. Different lenders will require different documentation and have other application procedures, though as a general rule of thumb, you’ll need:
However, as mentioned above, you may require further documentation if requested by the new lender.
Most urban property owners will not need to pay as much heed to this step, since they will usually assess the value using a computer evaluation. This means you will save on out-of-pocket costs as the lender does not need to examine the property physically.
However, for properties with little recent data available, or if your loan-to-value ratio (LVR) is higher than average, lenders will usually conduct a property inspection and evaluation. This process usually takes around 5 business days, and the lender will notify you of any relevant fees.
When both parties agree on the terms and conditions of the contract, a new home loan application will need to be submitted along with the necessary documentation so the new lender can begin their assessment.
If you meet all of the eligibility requirements, they will approve you for a home loan refinance, and you can let your current lender know that you are switching home loans. Afterwards, your new lender will then organise paying your old loan contract.
Once you have been fully approved and the new home loan is ready to sign, the new lender will forward through any necessary forms and contracts so you can proceed.
Since refinancing can become a little convoluted, we’ve put together a hypothetical scenario to break down all the steps into a real-world example.
Let’s say that John and Mary currently have a mortgage with an outstanding balance of $400,000. Their existing fixed-rate home loan has an interest rate of 5% p.a. with 15 years left on their loan duration. Without offset accounts or access to additional repayments, they must pay $3174 in monthly repayments.
After recognising that they are in a much better financial position than when they first signed up for the home loan, they have realised that paying off their mortgage sooner is of utmost priority.
After consulting a financial advisor and checking the market, the couple has noticed that interest rates are trending downwards, and many lenders are offering cashback offers for refinancing.
In this instance, they have determined they need a variable-rate home loan with access to offset accounts and additional repayments.
After checking the terms and conditions of their current home loan, they notice that their fixed rate period will finish shortly, and their home loan will be converted to a variable rate loan. In this case, John and Mary will not have to pay any break costs for exiting a fixed-rate home loan.
After comparing their home loan options, they found a different lender willing to refinance their home loan on a variable-rate mortgage at a rate of 4.5% p.a. and a refinancing fee of $1000.
Assuming the terms and other fees remain the same, they would make monthly repayments of $3082. Taking the refinancing fees into account and a $500 exit fee from their current lender, it equates to an overall saving of $16,511 over the life of their loan.
If, however, John and Mary want to pay the same amount as they did to the current lender on a fixed rate home loan with the same fixed interest rate of 4.5% p. a., they will save $23,315 and could pay off their mortgage 7 months earlier. With more cash available to them and access to an offset account and additional payments, John and Mary may also opt to inject a lump sum into their mortgage, potentially further reducing their interest repayments and saving even more in the long run.
After speaking to their current lender, John and Mary have realised that they will not be able to offer them the same favourable terms as described by their new lender, so they ready their documents and head over to apply.
With the property valuation taken care of and after being approved, John and Mary have saved tens of thousands on their mortgage by refinancing under the right circumstances.
There are several tools and resources that could help you refinance a home loan:
Before you decide to refinance a home loan, consider:
Our free Instant Match tool matches your profile with the three most competitive deals for your needs. Romantic but practical, and with a few simple clicks, the app will connect you to your desired lenders in no time!
Yes. Although it is a good way to access lower interest rates and fees, refinancing can hurt your credit score and lower your property value.
It usually takes 30-45 days for your refinancing application to be processed, but the time can vary based on your situation.
Yes. A refinance can be denied for several reasons, such as an incomplete application or negative changes in your income that might make your lender refuse to loan you.
Yes. Any sudden and negative changes to your credit or employment might cause your lender to deny the refinance before the money is paid out.
Yes. However, it is important to note that the process of refinancing your home loan is the same with the current lender as it is with a different one.