How to Refinance Your Home Loan
Australian mortgage holders are typically reluctant to switch home loans, even when interest rates are rising. However, a wave of successive hikes has forced many into action. So are you wondering how to refinance your home loan?
While it may seem like a hassle to swap lenders, technology has cut down on the paperwork making it easier than ever before to get a better deal on repayments. It is well worth making the effort as refinancing can not only save you hundreds of dollars every month, it can reduce the length of your loan and even unlock potential equity for investment properties.
In this blog post, we look at how to navigate your way through the maze of home loans to find the perfect one for you. We’ve put together a guide on how the refinancing process works, the benefits of refinancing, and how to make the most of the competition to get the best deal. Let’s get started!
When can you refinance a home loan?
Being approved for your first home loan is an exciting and life-changing moment.
Mortgages take a long time to pay off, but it doesn’t mean you have to stick with your original lender even if they helped you to take those first initial steps on the property ladder.
Once your honeymoon period with your existing lender is over, usually after a year or two, it is time to check that you are on the best deal. A discount on your home loan, even a small one, can make a big difference to your budget.
Jeff Chapman, Head of Product Marketing for LJ Hooker Home Loans, recommends reviewing your home loan annually – just like your electricity or insurance bills – to ensure the terms, agreement and importantly repayments are not only manageable but are suitable for your current lifestyle.
Refinancing is more than just searching for the cheapest interest rates. Lenders now provide a range of products such as an offset account or redraw facilities, and even the ability to consolidate debts.
"Often it is not until a mortgage broker or lending specialist shows a customer how they could be saving hundreds of dollars every month that decided to take action," says Mr Chapman.
The good news is that banks now share data meaning you don’t have to go through a mountain of statements to get the ball rolling on setting up a new home loan.
How much does it cost to refinance a home loan?
It is important to crunch the numbers to see whether refinancing your home loan will provide long-term savings.
Don’t just look at your new loan repayments – be sure to include any discharge fees from your current lender as well as any upfront fees that come with your new home loan.
It is likely you will incur application fees or break costs and may also need to pay for a property evaluation. In addition, there are mortgage deregistration fees that vary from state to state.
According to Canstar, the mid-range average cost of refinancing a home loan is around $800. But it may be as cheap as $75 or as expensive as $2100 on the upper end of the scale.
It is important to read all important documentation associated with refinancing your home loan. Your current lender should be able to provide information on what you can expect in discharge costs.
Be sure to ask for a 'Key Fact Sheet' from your new lender which will summarise your home loan. It will provide details on how much they should amount be paid back, establishment fees, ongoing fees, repayment per month and repayments per year. It may even show you how much you are paying back for every dollar borrowed.
Refinancing doesn’t mean you are exempt from Lenders Mortgage Insurance (LMI) – even if you paid it the first time round. This impacts borrowers who have less than 20 per cent equity in their property. This insurance, which protects your lender should you default on repayments, is non-transferable.
If you purchased at the peak of the market with a low deposit, you may find they have a higher loan-to-valuation ratio (LVR) due to falling house prices and now require LMI. Some lenders waive this requirement for certain professions such as those working in education, law enforcement, legal and accounting.
Where to find help?
A mortgage broker or lending specialist act as an intermediary between you and the banks. Just like finding a real estate agent, you should take the time to meet with a few experts to find the best match for you. Under current regulations, these specialists must provide three products for comparison.
Ensure your mortgage brokers and lending specialists have an Australian Credit Licence or are qualified to act as an authorised credit professional. As they are paid by commission, it is important you feel that your best interests are being represented. Under regulations, they must keep records to back up the decision made in conjunction with the borrower.
If you are self-employed, have past credit issues or are a first home buyer with a limited deposit, you may be best finding someone with expertise in this area.
How long does it take to refinance a home loan?
The length of time needed to refinance your home loan depends on the bank or lender. It can take as little as a few days to as long as six weeks.
Being organised will speed up the process and allow your application to be reviewed more quickly. One silver lining to the Covid-19 pandemic is that it streamlined processes making it easier for borrowers to swap lenders.
A common mistake is to choose a bank based on interest rates without checking whether you will fit their lending criteria – only to find the application is eventually rejected.
This is where a lending specialist can help you save time by making the right choice of where to successfully apply before lodging your application.
"Lenders these days are like big machines, and if you package up a deal well, it flows through the system and comes through the other end very quickly," says Mr Chapman. "But if you don’t, it gets stuck, and it can turn wheels for weeks and weeks and this can be incredibly frustrating for a borrower as they go back and forward."
Remember, having too much debt or a bad credit rating will potentially slow down your application or could see it being rejected altogether.
The home loan refinance process step-by-step
While it may sound like a lot of work, refinancing your home loan can be completed in a few easy steps. These are:
1. Educate yourself
Understand how refinancing works and how it may benefit your financial position. Decide on your what your goal – are you looking to minimise monthly repayments, reduce the life of the loan, set up an off-set account or consolidate debts such as credit cards?
2. Review your financial position
Look at your financial position, such as your loan balance, interest rates, repayments and length of the loan. It is important to know how much equity you have in your current property. If your credit score has improved, this may help you to get a better deal.
3. Shop around
How does your current home loan compare to others on the market? You can look at comparison sites or do so with the assistance of a mortgage broker or lending specialist or directly through the bank. Decide whether you want a fixed rate home loan or variable rate. Look at what other features are being offered with the new home loan that could help you to pay down your mortgage quicker or make repayments more manageable. You can find mortgage switching calculators online.
4. Apply for your new home loan product
It can be a good idea to apply with multiple lenders. You will need to provide proof of ID, details of your current mortgage, and income verification such as PAYG pay slips or two years’ worth of financials, lenders may also require statements on your debts and rates notices. As part of the application, you will also have to break down your monthly spending. You may also be required to have a property valuation conducted.
5. Exit your current home loan
The good news is that your new lender will be able to tell your current lender that you are refinancing. This includes any important documentation, title transfer and disbursing funds to repay the old loan.
Big banks versus other lenders
Australia has seen a huge influx of non-banks and big overseas banks enter the market over the past five years which has widen the choice for consumers. As a result it has also introduce a number of non-bank products to the market such as no income declaration loans for self-employed people and lending to overseas customers who want to invest in Australian property.
Mortgage brokers and lending specialists may also be able to offer products that have financial backing from one of the four big banks.
How to get the most of the competition and get the best deal
Before refinancing your home loan, contact your current financial institution and see if they can provide a more competitive rate. While it is now harder to negotiate a better deal, your lender may be more willing, particularly if you have more than 20 per cent equity in your property and a good credit score.
If you have no luck, then compare with what else is out there on the market.
Don’t be blinded by the glitter of a cash-back offer when refinancing your home loan. While it would be lovely to be rewarded for swapping lenders with a few thousand dollars in your account, these don’t always work out to be the cheapest in the long run. The same applies to honeymoon offers with low introductory rates to attract borrowers.
Your lending specialist or mortgage broker will be able to help you weigh up the pros and cons of a new deal. They will present you with three loan offer options, however, the onus is on the customer to make the final decision.
And don’t forget it is a competitive market out there. Your new lender may be willing to waive an application fee charge. Often it is a matter of if you don’t ask, you’ll never know!
If you are looking to refinance, speak to a lending specialist from LJ Hooker Home Loans. They will be able to help you navigate the refinancing journey.
DISCLAIMER - The information provided is for guidance and informational purposes only and does not replace independent business, legal and financial advice which we strongly recommend. Whilst the information is considered true and correct at the date of publication, changes in circumstances after the time of publication may impact the accuracy of the information provided. LJ Hooker will not accept responsibility or liability for any reliance on the blog information, including but not limited to, the accuracy, currency or completeness of any information or links.Share