Considering refinancing? Here’s a guide to refinancing a home loan.
Refinancing is likely something you’ve heard about before. But you may not know precisely what it is – or, more importantly, how it could make a difference to your financial situation. But refinancing is an incredibly useful tool, especially when life changes.
There may be interest rate rises, you may be getting married or you may have a new job. Whatever the change, there may be a loan that’s better suited to your life now. Refinancing is a fantastic tool to help.
So, let’s learn what refinancing is and how it can help you.
What is refinancing a home loan
In the simplest terms, refinancing a home loan means moving your loan from one lending institution to another, or from one home loan product to another, after your mortgage is in place.
The process is also very straightforward. Once you’ve found the loan that suits you, you simply need to fill in your application forms, and the lender will take it from there. They will provide you with new loan documents to sign and will take care of organising the exchange of funds with your old lender.
When you refinance, your new lender considers it a whole new loan.
Reasons for refinancing a home loan
There are many reasons why you may consider refinancing a home loan. The terms of a new loan might be more financially attractive than your existing mortgage. Or it may have a better interest rate or more flexible features.
The most common reasons are:
- to reduce your home loan interest rate.
- to get features that your current home loan may be missing (such as an offset account).
- because you are unhappy with your current lending institution.
- to consolidate debt.
- to fund a big expense such as a renovation, car purchase or travel.
Interest rate or home loan features
A lower interest rate on your home loan could save you thousands in interest repayments over the life of your home loan. The Australian Competition and Consumer Commission (ACCC) found that borrowers could save more than $17,000 in interest over the life of a home loan.
A lower interest rate could also reduce your home loan repayment amount.
Refinancing for a new home loan feature (such as flexible repayment options, redraw facilities or an offset account) is another reason why you may consider refinancing.
Refinancing your home loan to consolidate debt (such as a car loan and credit cards) into your mortgage is a great option. Mortgages offer comparatively low interest rates. So consolidating your loans in this way will reduce your monthly repayments and cut down the time and energy spent on managing multiple loans.
Be aware, however, that consolidating your debts through your mortgage can ultimately extend the term of your home loan. And that means you could be paying more interest over a longer period.
Use the equity in your home for lifestyle reasons
Equity is the dollar amount of ownership you have in a property minus the amount owed to the lending institution. For example, if your home is worth $800,000 and the balance of your home loan is $500,000, your equity in your property is $300,000.
You may wish to refinance to access the equity in your home loan. Often people use these equity funds for things like maintaining or renovating your home, as a deposit for another property, investing in shares, buying a new car or travel.
Two Types of Refinancing
There are two main types of home loan refinancing:
- Internal refinance, where you refinance your home loan with your existing lender.
- External refinance, where you move your home loan to another lending institution.
You may choose to refinance with your existing lender (internal refinance) for many reasons. Perhaps they’re offering a new, better deal that you’d like to take advantage of. Perhaps your existing loan has a lot of bells and whistles you aren’t accessing or simply don’t need. Whatever the reasons, refinancing with your current lender can save you fees associated with changing lenders.
If you have a home loan that’s a few years old, talk to your current lending institution to see if there’s a better home loan product more suitable for your situation.
If you have found a better loan product from another lender, or are simply unhappy with your current lender for any reason, then you can consider external refinance as well. Take a look around and see what’s on offer in the current market.
Who Should Refinance
This is a question only you can answer, as your own situation is unique. What we can say though is that refinancing a home loan could be beneficial if you believe you are paying too much interest on your existing home loan, or if your personal circumstances have changed.
If your income has changed, your family situation has changed, such as through a new baby or divorce, you have recently retired or been made redundant – all of these are relevant reasons to.
Costs Associated With Refinancing a Home Loan
When comparing home loans for refinancing, it’s important to consider any costs involved. Some of these could include:
- Exit fee
An exit fee may be charged by your existing home loan lender, if you have an older home loan taken out prior to 1 July 2011 (home loan exit fees on new home loans were banned under the Gillard government over ten years ago).
- Application or establishment fee
Application or establishment fee may be charged by some lending institutions to cover the costs of setting up your home loan.
- Valuation fee
Your new lender may require a valuation of your property before proceeding to refinance. The fee for this can depend on the particular lending institution and where your property is located. Fees tend to be higher in rural areas compared to urban areas. Many lending institutions don’t charge a valuation fee at all, so it’s best to find out.
How Long Does the Refinancing Process Take?
From start to finish, refinancing a home loan can take anywhere from a couple of days to a couple of months. In most cases, the process is completed within four to eight weeks. As the length of time can vary depending on the complexity of your home loan and personal circumstances, it’s important to allow more time than you think you will need.
It can help to have all your documentation ready to go, and also to seek pre-approval with the new lending institution.
There are many reasons to refinance, and a few steps involved and things to be aware of. Our mini checklist is to:
- Gather your paperwork. This is similar to what was required for your home loan in the first place, and includes proof of income, your current home loan statement, living expenses, current debts and assets.
- Seek pre-approval with the new lending institution.
- Work out the refinancing costs vs benefits. Write up a pros and cons list and work through it.
- Be clear on your own personal reasons for refinancing.
We’ve shared our top tips to consider when refinancing in an earlier post.
Speak to an Expert
When you’re ready to work through your refinancing checklist, we’re ready to help. Our expert team can talk to you about how to get refinancing ready, and do the legwork involved in comparing home loans and any relevant fees.