A beginner's guide to refinancing home loans

A beginner's guide to refinancing home loans

As much as we often want things to stay the same over time, often our situation changes. Whether it’s a home no longer being suitable for a growing family, your job taking you to a new location, or simply a once-happy relationship breaking down, we often realise that big shifts have occurred in our lives and change is required.

This is no different when you take out a home loan. Price cycles rise and fall, and interest rates oscillate over time as well. Add in changes to your income, and you may find yourself in a completely different financial situation than you were five years ago, for better or worse. When this is the case, it might be time to consider refinancing. 

When is the right time to refinance?

The right time to refinance depends on one basic principle: when the difference between your current interest rate and the average market rate is close to 1 percent.

Take Jenny, for instance. Five years ago she took out an introductory rate home loanwhich reverted to her current variable rate of 7.81 percent. With an outstanding balance of $320,000, her monthly repayments over the next 20 years are about $2640, which equates to $633,334 over the loan term (assuming the interest rate remains the same).

If you compare this to the current average basic variable rate of 6.80 percent, that’s 1.01 percentage points less than Jenny’s current rate. By refinancing and switching to a cheaper loan with the average basic variable rate, Jenny could save herself almost $200 per month, and almost $47,280 in interest over the loan term. This doesn’t take into account break costs Jenny may be charged from her old loan and establishment fees for a new loan.

And that’s not even the best deal Jenny could find. For instance, one of the lowest-rate home loans on RateCity is by State Custodians with a comparison rate at 6.46 percent. In Jenny’s case, this is 1.35 percentage points less than what she currently pays with her lender. If she was to switch, she could potentially save herself $262 each month or $62,880 over the next 20 years of her loan (if rates remain the same, not including associated fees and charges).

If your situation is similar to Jenny’s then you should consider refinancing your mortgage as there may be better deals and savings you could be missing out on. The first step to refinancing is to compare home loans online every 12 months to see how your deal measures up to what’s on the market.

What is refinancing, and why do people do it?

Refinancing is the process of taking out a new home loan, which replaces your existing mortgage with a new set of interest rates, terms and conditions. It can be done for a number of reasons:

  • Securing a home loan at a lower interest rate
  • Decreasing monthly mortgage repayments
  • Rolling several existing debts into one package
  • Freeing up cash for a large-scale purchase
  • Switching to a different lender
  • Paying less in mortgage fees

On the whole, it is a process by which people try to save money. Over time, interest rates on a loan may increase, meaning it is no longer feasible for you to continue making these repayments. Or perhaps you have changed jobs and are unable to keep up with the fees. Many Australians have refinanced their home loans to great effect, but it is not a one-size-fits-all solution.

Example refinancing rates:


What are the risks of refinancing?

There can be some upfront costs associated with refinancing a home loan. Firstly, there may be exit fees on your current mortgage. However, these are not incurred if you took out a home loan after July 2011, thanks to a ban on them from the Australian government. 

The Reserve Bank of Australia has noted certain mortgage lenders or brokers make commission when they persuade someone to switch from one home loan to another. This is important to keep in mind when considering refinancing, and it may be prudent to find out how your broker or lender is paid. 

Furthermore, it is important to use a home loan calculator to determine whether you will actually pay more in the long run. Consolidating short term debts (like credit cards) into a home loan refinancing package could actually result in a higher overall cost, as you may be paying interest on a short-term line of credit over a much longer period.

You may also refinance a 20-year mortgage to one with a 30-year term to reduce monthly repayments, but keep in mind that you will also pay more interest in the long-term. 

Is it worth it? 

As with any move that boosts your credit, products should be carefully compared, and pros and cons need to be laid out in full. Undertaking due diligence and research is a must, as is using a home loan calculator to work out how much you will pay in both the short term and long term.

At the very least, consider using this guide to give yourself a home loan health check. Doing so can give you the necessary information about how your loan compares with the market, and if your mortgage doesn’t stack up, then talk to your lender about how they can give you a better deal on rates, fees or both.

Try our calculator:

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How do I refinance my home loan?

Refinancing your home loan can involve a bit of paperwork but if you are moving on to a lower rate, it can save you thousands of dollars in the long-run. The first step is finding another loan on the market that you think will save you money over time or offer features that your current loan does not have. Once you have selected a couple of loans you are interested in, compare them with your current loan to see if you will save money in the long term on interest rates and fees. Remember to factor in any break fees and set up fees when assessing the cost of switching.

Once you have decided on a new loan it is simply a matter of contacting your existing and future lender to get the new loan set up. Beware that some lenders will revert your loan back to a 25 or 30 year term when you refinance which may mean initial lower repayments but may cost you more in the long run.

How do you determine which home loan rates/products I’m shown?

When you check your home loan rate, you’ll supply some basic information about your current loan, including the amount owing on your mortgage and your current interest rate.

We’ll compare this information to the home loan options in the RateCity database and show you which home loan products you may be eligible to apply for.

 

What happens to my home loan when interest rates rise?

If you are on a variable rate home loan, every so often your rate will be subject to increases and decreases. Rate changes are determined by your lender, not the Reserve Bank of Australia, however often when the RBA changes the cash rate, a number of banks will follow suit, at least to some extent. You can use RateCity cash rate to check how the latest interest rate change affected your mortgage interest rate.

When your rate rises, you will be required to pay your bank more each month in mortgage repayments. Similarly, if your interest rate is cut, then your monthly repayments will decrease. Your lender will notify you of what your new repayments will be, although you can do the calculations yourself, and compare other home loan rates using our mortgage calculator.

There is no way of conclusively predicting when interest rates will go up or down on home loans so if you prefer a more stable approach consider opting for a fixed rate loan.

What are the different types of home loan interest rates?

A home loan interest rate is used to calculate how much you’ll pay the lender, usually annually, above the amount you borrow. It’s what the lenders charge you for them lending you money and will impact the total amount you’ll pay over the life of your home loan. 

Having understood what are home loan rates in general, here are the two types you usually have with a home loan:

Fixed rates

These interest rates remain constant for a specific period and are a good option if you’re a first-time buyer or if you’re looking for a fixed monthly repayment. One possible downside of a fixed rate is that it may be higher than a variable rate. Also, you don’t benefit from any lowering of interest rates in the market. On the flip side, if rates go up, your rate won’t change, possibly saving you money.

Variable rates

With variable interest rates, the lender can change them at any time. This change can be based on economic conditions or other reasons. Changes in interest rates could be beneficial if your monthly repayment decreases but can be a problem if it increases. Variable interest rates offer several other benefits often not available with fixed rate home loans like redraw and offset facilities and free extra repayments. 

Does the Home Loan Rate Promise apply to discounted interest rate offers, such as honeymoon rates?

No. Temporary discounts to home loan interest rates will expire after a limited time, so they aren’t valid for comparing home loans as part of the Home Loan Rate Promise.

However, if your home loan has been discounted from the lender’s standard rate on a permanent basis, you can check if we can find an even lower rate that could apply to you.

How do I apply for a home improvement loan?

When you want to renovate your home, you may need to take out a loan to cover the costs. You could apply for a home improvement loan, which is a personal loan that you use to cover the costs of your home renovations. There is no difference between applying for this type of home improvement loan and applying for a standard personal loan. It would be best to check and compare the features, fees and details of the loan before applying. 

Besides taking out a home improvement loan, you could also:

  1. Use the equity in your house: Equity is the difference between your property’s value and the amount you still owe on your home loan. You may be able to access this equity by refinancing your home loan and then using it to finance your home improvement.  Speak with your lender or a mortgage broker about accessing your equity.
  2. Utilise the redraw facility of your home loan: Check whether the existing home loan has a redraw facility. A redraw facility allows you to access additional funds you’ve repaid into your home loan. Some lenders offer this on variable rate home loans but not on fixed. If this option is available to you, contact your lender to discuss how to access it.
  3. Apply for a construction loan: A construction loan is typically used when constructing a new property but can also be used as a home renovation loan. You may find that a construction loan is a suitable option as it enables you to draw funds as your renovation project progresses. You can compare construction home loans online or speak to a mortgage broker about taking out such a loan.
  4. Look into government grants: Check whether there are any government grants offered when you need the funds and whether you qualify. Initiatives like the HomeBuilder Grant were offered by the Federal Government for a limited period until April 2021. They could help fund your renovations either in full or just partially.  

How long can you fix a home loan rate for?

Most lenders should let you fix your interest rate for anywhere between one and five years. While rare, a few lenders may offer fixed rate terms for as long as 10 years.

Fixing your home loan interest rate for a longer term can keep your budgeting fairly straightforward, as you shouldn't have to factor in changes to your mortgage repayments if variable rates change, such as when the Reserve Bank of Australia (RBA) changes its rates at its monthly meeting. Additionally, if variable rates rise during your fixed rate term, you can continue to pay the lower fixed rate until the fixed term ends, potentially saving you some money.

Of course, a longer fixed term also means a longer length of time where you may have less flexibility in your home loan repayments. It’s also a longer period where you won’t be able to refinance your mortgage without paying break fees. If variable rates were to fall during this period, you may also be stuck paying a higher fixed rate for a longer period.

Remaining loan term

The length of time it will take to pay off your current home loan, based on the currently-entered mortgage balance, monthly repayment and interest rate.

What is the Home Loan Rate Promise?

The Home Loan Rate Promise is RateCity putting its money where its mouth is. We believe that too many Australians are paying too much for their home loans. We’re so confident we can help Aussies save money, if we can’t beat your current rate, we’ll give you a $100 gift card.*

There are two reasons it pays to check your rate with the Home Loan Rate Promise:

  • You can find out how much you could save on your home loan by switching to a loan with a lower interest rate
  • If we can’t beat your current rate, you can claim a $100 gift card with our Home Loan Rate Promise*

What is a variable home loan?

A variable rate home loan is one where the interest rate can and will change over the course of your loan. The rate is determined by your lender, not the Reserve Bank of Australia, so while the cash rate might go down, your bank may decide not to follow suit, although they do broadly follow market conditions. One of the upsides of variable rates is that they are typically more flexible than their fixed rate counterparts which means that a lot of these products will let you make extra repayments and offer features such as offset accounts.

Can I take a personal loan after a home loan?

Are you struggling to pay the deposit for your dream home? A personal loan can help you pay the deposit. The question that may arise in your mind is can I take a home loan after a personal loan, or can you take a personal loan at the same time as a home loan, as it is. The answer is that, yes, provided you can meet the general eligibility criteria for both a personal loan and a home loan, your application should be approved. Those eligibility criteria may include:

  • Higher-income to show repayment capability for both the loans
  • Clear credit history with no delays in bill payments or defaults on debts
  • Zero or minimal current outstanding debt
  • Some amount of savings
  • Proven rent history will be positively perceived by the lenders

A personal loan after or during a home loan may impact serviceability, however, as the numbers can seriously add up. Every loan you avail of increases your monthly installments and the amount you use to repay the personal loan will be considered to lower the money available for the repayment of your home loan.

As to whether you can get a personal loan after your home loan, the answer is a very likely "yes", though it does come with a caveat: as long as you can show sufficient income to repay both the loans on time, you should be able to get that personal loan approved. A personal loan can also help to improve your credit score showing financial discipline and responsibility, which may benefit you with more favorable terms for your home loan.

What is the average length of a home loan?

Most Aussie lenders offer home loans with a 30-year term, meaning that you should pay back the full loan amount and the interest you owe on the amount in 30 years. 

However, home loans can also have a shorter or longer term. They may be as low as ten years or up to 45 years, depending on the product and lender. 

It’s worth remembering that a longer loan term usually means you’ll end up paying a lot more interest in total, but your scheduled repayments may be more manageable. In contrast, you could opt for a shorter loan term if you are comfortable making large repayments in exchange for paying less interest over the term of the loan.

How do I calculate monthly mortgage repayments?

Work out your mortgage repayments using a home loan calculator that takes into account your deposit size, property value and interest rate. This is divided by the loan term you choose (for example, there are 360 months in a 30-year mortgage) to determine the monthly repayments over this time frame.

Over the course of your loan, your monthly repayment amount will be affected by changes to your interest rate, plus any circumstances where you opt to pay interest-only for a period of time, instead of principal and interest.

Who has the best home loan?

Determining who has the ‘best’ home loan really does depend on your own personal circumstances and requirements. It may be tempting to judge a loan merely on the interest rate but there can be added value in the extras on offer, such as offset and redraw facilities, that aren’t available with all low rate loans.

To determine which loan is the best for you, think about whether you would prefer the consistency of a fixed loan or the flexibility and potential benefits of a variable loan. Then determine which features will be necessary throughout the life of your loan. Thirdly, consider how much you are willing to pay in fees for the loan you want. Once you find the perfect combination of these three elements you are on your way to determining the best loan for you.