Refinancing Home Loan

Refinancing your home loan could save you thousands.
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Refinancing your home loan could save you a lot of money. It is a good idea to review your home loan every few years, just to be sure you’re still getting a competitive deal, but a lot of people don’t know where to start or find the process daunting.

Researching refinancing is a lot like looking for your first home loan but with a few extra considerations.

InfoChoice can help home owners compare the many and varied options available, as well as answer any frequently asked questions about refinancing.

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*The comparison rates in this table are based on a loan amount of $150,000 and a term of 25 years. WARNING: These comparison rates apply only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and costs savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan. Comparison rates are not calculated for revolving credit products.

Monthly repayment figures are estimates only and exclude fees. Based on the advertised rate, 25 year term and loan amount entered. Actual repayments will depend on your individual circumstances and interest rate changes. Interest only loans – the monthly repayment figure is applicable only for the interest only period. After the interest only period, your principal and interest repayments will be higher than these repayments. Fixed rate loans – the monthly repayment is based on an interest rate that applies for an initial period only and will change when the interest rate reverts to the applicable variable rate.

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The comparison rates are based on a secured loan amount of $150,000 and a term of 25 years. WARNING: These comparison rates apply only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and costs savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan. Comparison rates are not calculated for revolving credit products.
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Refinancing a home loan: what does that mean?

Refinancing means switching from your existing home loan to a new one. You can switch loans with your current lender or get a new product with a new lender. For most people, refinancing is undertaken to get a lower rate, better terms and features, or both.

Why would I refinance my home loan?

Approximately 85% of Australians don’t even know their interest rate, let alone whether they could be getting a better deal, and it’s costing them thousands of dollars a year. There are, however, many reasons why homeowners may choose to refinance.

Some of these include:

  • Saving money: Refinancing could help you take advantage of a better deal, such as a lower interest rate, which could reduce your regular payments and put more money in your pocket.
  • To pay your loan faster: By switching to a lower interest rate but keeping up the same repayments you make now, you can shave years off your loan term. This will not only mean you’re home loan-free sooner, but will also save you on interest.
  • Borrowing more: It could be possible for some borrowers to change the conditions of their loan, such as increasing the amount borrowed, to raise capital for other purposes such as a renovation.
  • Your financial situation has changed: Chances are that many things have changed since you first signed up for your home loan. You may have got a new job or had kids, or you paid off other debts that were dragging you down. These changes can impact your cash flow or asset base, so a new home loan could suit you better.
  • Bundling: Moving all your banking business to a single financial institution could allow you to access package deals or other benefits.
  • Consolidating debts: In some circumstances, it may also be possible to consolidate multiple debts into the one home loan when refinancing. There are however risks associated to this, so it is important to seek professional financial advice before committing to a change.
  • To access flexible features: People often start with a simple, no-frills home loan, but after a few years you might want to refinance to an option with a few more features; like extra repayments. an offset account, or a redraw facility.
  • Your LVR has changed: If you picked up your first home loan with a small deposit of 10% or even 5%, then you probably didn’t get the absolute best interest rate around, since the best offers are reserved for borrowers with Loan to Value Ratio’s (LVR) of 80% or below. Once you’ve paid off some of your loan and your LVR decreases, you may be able to secure a better interest rate.

How do I refinance my home loan?

The whole refinancing process takes a little time and research, but it’s pretty straightforward for most people. Refinancing your home loan can be broken down to a number of simple steps:

  1. Look at the cost of your current home loan
  2. Ask your current lender for a better deal
  3. Establish how much it will cost to exit your current loan
  4. Compare home loans
  5. The costs of moving to a new lender
  6. Apply for your new home loan
  7. Exit your old loan

1. Look at the cost of your current home loan

If you’re thinking about refinancing, the first thing to do is to look at how much you’re currently paying. Your interest rate should be listed on your home loan statement. If your lender has online banking, you should be able to use it to find your current rate in your account information.

If you can’t find your statements and you don’t have access to Internet banking, you might also be able to check your rate using your lender’s website. If you have a fixed rate loan, you’ll be paying the rate that was on offer when your home loan settled rather than the rate that’s on offer now.

If all else fails, you can call your lender to find out. But you’ll need to have some account information handy, such as an account number or customer number.

It’s also important to find out about any ongoing or annual fees you’re paying as well. These will factor into your calculations when you work out how to get yourself a better deal.

2. Talk to your current lender about a better deal

One big step many people miss in the refinancing process is talking to their current lender about getting a better rate. This should always be one of the first steps you take, because your lender is highly motivated to keep you. In fact, they have entire teams devoted solely to keeping you as a customer.

Bringing in new business costs a bank more than retaining old business. Your current lender doesn’t want you to leave, because after paying your home loan for a few years you’re a more profitable customer than a brand new home loan customer.

You can try to get a better deal in a couple of different ways. One way is to just ring and ask. Tell them you’re thinking about shopping around for a new home loan provider, and ask what kind of deal they’re willing to offer to make you stay. It’s likely they’ll be willing to negotiate to keep your business.

While you might not have thoroughly researched all your home loan options at this point in the refinancing process, it is good to have a rough idea of some of the rates on offer. If you can quote your lender a lower rate you’d like to be paying, you have a point at which to start your negotiations.

Generally, your current lender will offer you a better deal, but you should still undertake the research laid out in the steps ahead to make sure it makes sense to stay with them instead of finding a better deal somewhere else.

3. Establish how much it will cost to exit your current home loan

There will be some costs associated with leaving your current lender. This usually isn’t more than a couple of hundred dollars, so it shouldn’t seriously eat into your refinancing savings, but you should still check to see exactly how much you’ll be paying.

If you’re in a fixed rate home loan, you’ll need to check the break costs for leaving your loan before the term is over. These can run into the tens of thousands, but could be as low as a few hundred dollars. The best way to find out is to simply call your lender and ask.

You’ll also want to figure out if you’ll be forced to pay lenders mortgage insurance (LMI). If you do have to pay LMI, different providers will offer different charges.

4. Compare home loans

This is where you take all the information you’ve collected so you can start comparing products. By using the InfoChoice tables, you can easily assess some of the best rates on the market to make comparing products easy.

The first thing you will probably notice is that there will be lenders with cheaper rates than you are currently paying; however it’s important to compare home loans beyond simply the headline rate.

While that interest rate is obviously important, you also need to consider the following factors:

Fees: High annual or ongoing fees will affect the value you get from moving to a new lender. Not all fees are a deal-breaker. For instance, some package loans charge an annual fee, but also offer significant discounts or surrender relinquish other fees. To get an idea of whether the fees associated with a new lender are too high to make refinancing a good idea, take a look at the comparison rate; which incorporates account fees and charges, along with the interest rate.

Features: Remember to compare home loans by examining the features they offer, since some of these features can help save years off your home loan. Some features you might look for would be an offset account, redraw facilities, flexible repayment options and split facilities.

Flexibility: A good home loan will offer flexibility and allow you to manage your finances the way that’s best for your specific circumstances. Flexible options include; extra repayments, more flexible repayment frequency (weekly or fortnightly) and loan transferability.

Once you’ve looked into the rates, fees, features and flexibility of different home loan products and narrowed down your search, it’s time to weigh up the cost of switching lenders.

5. The costs of moving to a new lender

Having already established the cost of exiting your old loan, you’ll now want to look at the up-front costs of moving to a new lender. Common up-front fees include an application fee, a settlement fee and a valuation fee.

However, when you’re looking into these fees, pay attention to any promotions lenders are running. Lenders love to get refinancing home loans. They’re usually profitable loans from borrowers with a proven repayment track record. Lenders are also known to offer special deals where they waive fees for refinancers, or even offer to pay clients some of costs associated with leaving their current lenders, in order to attract refinancing business.

Once you’ve worked out the costs of leaving your old lender and the costs of moving to your new lender, you should get a good idea of how much you’ll actually save by switching. You should also be able to identify the lender and home loan product that will deliver the biggest savings.

6. Apply for your new home loan

Now that you’ve found the home loan that’s going to give you the best deal, the features you want and the biggest savings, it’s time to apply. The application process can vary between lenders, with some now operating entirely online, while others will still use paper forms and require you to mail or scan the documents. Whichever method, it’s handy to have a few details ready:

Personal information: You’ll need to provide your name, date of birth and contact info. Also, you’ll be asked to produce a valid ID, such as a driver’s license, Medicare card or passport.

Financial information: You must provide details of your employment, income, assets and liabilities. Lenders will want documentation on this, so you’ll need to have payslips and bank statements ready.

Loan information: Details of your current home loan are required, so your lender can see your repayment history and outstanding loan amount.

Property information: As you would expect, you new lender will need details about your current property; and undertake a valuation done to evaluate its current value to determine how much to lend you.

Moving from application to approval can take anywhere from one to eight days, with some online providers approving in a matter of hours.

7. Exit your old home loan

Your new lender will coordinate with your old lender to discharge you from your old home loan. They’ll work together to exchange all the necessary documentation.

At this stage, your new home loan will be at ‘settlement’, and funds of the new loan are distributed to pay out your old home loan. Moving from application to settlement should occur within a couple of weeks.

What should I consider when refinancing?

The home loan market is full of different products offering a wide range of deals and options, so take the time to choose a home loan that will work for you.

As with any home loan, you’ll need to determine what type of interest rate you’ll choose when you make the switch:

Fixed interest rate: By locking in your interest rate with a fixed interest rate, you have certainty around your repayments; however you do need to be comfortable that you will not want to change or end your fixed rate loan prematurely, as that can incur a significant ‘break fee’ charge.

Variable interest rate: This option will offer competitive rates as well as flexible features. For example, a 100% offset account facility is usually only available with variable rate loans. You do need to remember that the interest rate of a variable rate loan could change at any time, so you’ll need to be able to make higher repayments if interest rates rise.

Split rate loan: As the name does suggest, this option allows you to set a fixed rate for a percentage of your loan to provide some security and confidence around interest rates, with the remaining percentage at a variable rate to take advantage of flexible features.

Any home loan needs to incorporate more than just the interest rate. When looking at refinancing, consider these points as well:

Extra repayments: This feature simply allows you to make additional payments which will bring down the amount of interest you pay and also shorten the life of the loan; saving you thousands.

Mortgage offset: Another way to bring down the interest you pay is by refinancing to a home loan that comes with an offset account. A mortgage offset is effectively you everyday transaction account where you would have your salary deposited, and you would use to make everyday purchases and ATM withdrawals. Because the balance of your home loan is offset daily against the home loan principal, any money in the offset account will reduce the amount of interest you pay. So if you have an offset account with a balance of $40,000 and a home loan of $500,000, you’ll only be charged interest on $460,000.

Flexible repayments: Always look for a home loan that allows you to choose your repayment schedule. A simple move like setting up your repayments to a fortnightly schedule, rather than monthly, can save you a lot of money in the long term. For instance, a monthly repayment of $5,000 will mean you’ve paid back $60,000 over a year, whereas a fortnightly repayment of $2,500 will mean you’ve paid off $65,000. Over the course of the year you have paid an extra month’s worth and reduced your interest at the same time.

What are the costs of home loan refinancing?

Much like applying for your first home loan, refinancing a home loan often involves paying fees and charges. These could include exit fees on your current loan, and establishment or other upfront fees on your new loan. If your current loan is on a fixed interest rate and you haven’t finished the full term of the loan, you will most likely need to pay break fees if.

It’s also worth considering the time and effort involved in home loan refinancing, which can take anywhere from a few days to a couple of weeks. It may be possible to speed up the home loan refinancing process if you can organise your paperwork in advance.

Common fees include:

Discharge fee: When you farewell your old provider, they may charge you a termination fee that can be anywhere from $0-$600. If you are on a fixed rate loan and want to end it before the full term, you will most likely be charged a break fee on top of the discharge fee.

Application fee: Many loans will charge an upfront application fee ranging from $0-$1,000; however some lenders will waive this if you’re a creditworthy borrower.

Registration fee: Another fee to budget for is the registration fee when you roll your home loan over to the new provider, with the cost depending on the state you live in.

Government fees: When you are refinancing, you will generally be required to pay two state government fees, one to discharge their old loan and one to register the new one.

Valuation fee: The new lender may want to value your property and charge you a fee for a valuer to come out to your property.

Settlement/legal fee: At the point when your new loan reaches ‘settlement’, you may incur a fee.

Fixed rate break costs: If you are currently on a fixed rate home loan and are seeking to end the loan before the full term, you will most likely incur a break fee cost. This can be significant, with many borrowers choosing to wait until the fixed period ends before refinancing.

Is there any reason why I wouldn’t refinance?

There are times when refinancing your home loan is not the best idea. At the most obvious level, you may actually already have the best home loan offer around.

However, even if you do find a lower rate when comparing home loans, refinancing may not be a good move. Common reasons include:

You are in the middle of a fixed term: Fixed rate home loans often come with break fees if you wish to end the loan before the full term. This means, if you pay off or refinance your loan before the fixed period ends, you might get hit with a hefty fee. It’s best to ask your lender for an estimate of that fee so you can make an informed decision about whether refinancing would ultimately cost you money.

You still have an LVR above 80%: If you took out a home loan with a deposit of less than 20%, you probably remember the sting of having to pay Lender’s Mortgage Insurance (LMI). Well, unfortunately, refinancing your home loan when you still need to borrow more than 80% of your home’s value will mean you’ll have to pay LMI all over again.

Variable Rate Home Loan

Variable rate home loans are a popular choice for Australian homebuyers. They offer flexibility and may allow you to take advantage of cuts to the official interest rate, depending on whether your financial provider passes on the change.

Our comparison table breaks down the features, rates and fees of different variable home loans from a range of lenders. Take special note of the comparison rate, which combines the advertised interest rate with any fees and charges, so you can estimate the average total cost of each loan.

Refinance Home Loan FAQs

How does refinancing work?

When you refinance, the money from the new loan is used to pay out all or some of your existing loan. The new loan often comes from a different lender, but many people refinance with the lender they’ve been using for years. If you move to a new lender, they will liaise with your current lender to pay out the loan.

What do I need to consider when refinancing?

When undertaken with serious thought, planning and research, loan refinancing can have many benefits; however it is important to recognise potential costs that you might incur in the process.

Can I refinance if I have bad credit?

Some lenders will accept bad credit borrowers, but might charge higher interest rates and fees. It’s a good idea to get a copy of your credit file before making any applications. You can also look for a credit repair company who, in some cases, can help remove some negative listings on your file.

What is equity and how much do I need to refinance?

Equity refers to the amount of your property that you own outright. The more you pay down your loan, and the more your property increases in value, the more equity you have. Refinancing at its core is leaving your new home loan and applying for a new one, meaning that regular equity requirements will still apply. This means you’ll need a minimum of 20% equity in your home, but in some cases this will be as little as 5%.

Can I refinance without equity?

It will be difficult to refinance a home loan if you haven’t gained any equity. You may want to speak to a broker about your options, or wait until you’ve gained enough equity.

How long does it take to refinance my home loan?

There is no set period of time to refinance a home loan. The first stage of researching your options and pulling together your necessary documentation takes as much time as you want or have. Some people can pull it together in a matter of days, others like to take weeks or more to fully immerse themselves in the options available.

Once you’ve applied for the refinancing loan, it will take as long as the bank determines, however there are officially two options: fast track refinancing, or standard refinancing.

Fast track: Fast refinancing can take as little as three days; however you may be required to pay title insurance, in case there are problems when transferring the title after they have paid out your loan.

Standard process: Standard process won’t incur any title insurance payments, however it generally takes 3-4 weeks to complete.

Do I need to refinance when adding someone to the home loan or property title?

As a general rule, no, however you will need to fill in some paperwork for relevant Government body. It is best to seek advice from a solicitor to ensure all requirements are met.

What fees should I watch out for when I refinance my home loan?

One of the barriers to refinancing is that there are a number of fees that may apply when you do so. Firstly, you might be charged a discharge or early break fee when you close out your old loan.

Secondly, you need to be aware of any normal fees attached to your new loan, such as an application fee, valuation fee or annual service fee. It’s important to know all of these fees before you refinance to ensure the cost of fees doesn’t outweigh the benefit of making a switch.

Refinance Home Loans glossary of terms

Comparison Rate A Comparison Rate is the interest rate plus fees and charges rolled into a single percentage rate for ease of comparison.
Exit cost The fee charged to borrowers if they exit their home loan early. This is usually applied to fixed interest rate loans.
Fixed interest rate Fixed interest rates are interest rates that are locked in for a certain period of time, usually between one and five years.
Lenders Mortgage Insurance (LMI) An insurance that protects the home loan lender, if a borrower defaults on their payments. An LMI is typically applied to home loans where the loan to value ratio (LVR) is higher than 80%, or the borrower has a deposit of less than 20%.
Loan to Value Ratio (LVR) Most lenders require an LVR Of 80%, this means the borrower will pay 20% of the value of the property. Essentially, it is the size of a home loan compared to the value of the property.
Offset An offset account is a transaction bank account connected to your home loan. The money from this account is used to offset your home loan, which means you’re only charged interest on the difference between the total loan balance and the amount offset. For example, if you owe $200,000 on your home loan but you have $20,000 in your offset account, the bank would only calculate interest on $180,000.
Fees Home loans usually come with a range of such as redraw fees that are charged monthly or annually over the life of the loan.
Overdraft An overdraft is an extension of credit from a lending institution. Overdrafts are granted when an account reaches zero or there are insufficient funds to make a withdrawal. In property. It can be used as a line of credit, secured by the equity in the property.
Split Rate Home Loans A split home loan is when you divide your loan into two parts. This means a portion of the loan could come under a fixed interest rate with the remainder being variable.
Variable Rate Loan Variable home loans are defined by the potential for interest rate fluctuations. The variable interest rate may be changed regularly by a lender and is usually dictated by the Reserve Bank of Australia’s (RBA) official cash rate and changes in market interest rates. Due to interest rate fluctuations, your monthly repayments could vary from month to month. With lower exit fees, more flexible repayment options and useful features like offset accounts and redraw facilities, variable home loans have been found to be the preferred choice for many Australians.