Refinancing: how to make the right decision in six steps

Refinancing: how to make the right decision in six steps

Before you travel down the refinancing road, it’s critical to pause and evaluate the process. Your plans may come undone if you proceed without knowing what exactly you’re getting yourself in to. 

Having a defined goal and all the information you need on hand will help the refinancing process run smoothly as you will know exactly what to look for and where to find it. Below are the six steps to making the right refinancing decision that will help guide you through what can be a sometimes confusing and overwhelming process.

1. Define your refinancing goal

Before you start your refinancing journey it is important to know what you want to get out of the process. Your aim may be simply to reduce the size of your monthly repayments or to pay off your loan quicker. This may require you to look for certain features such as low interest rate loans and loans that allow extra repayments.

Other borrowers may wish to release the equity in their loan or consolidate other debts such as personal loans and car loans. Depending on what your goal is, the type of loan that you look for will vary and this is why it is important to establish early on what you want to get out of refinancing.

With literally thousands of home loans on the Australian market, being able to narrow down your search by aim will be the quickest way to get you to the right product for you. Take time at this first step to think about what a successful refinance would look like to you.

2. Find important information

Once you know why you are refinancing it will be time to prepare to begin the process. To do this you will need to arm yourself with the all the relevant information about your current loan that will help you determine what you need in a new loan. It will also help you to figure out the potential amount you could save by refinancing.

The information you should gather includes your current interest rate, your outstanding loan amount, the remainder of your loan term and your property’s current value. By understanding your current position, you will be better placed to see which lenders are offering a more competitive deal than your current loan.

Low rate refinancing loans

 

3. Compare the alternatives

When you have the background information covered you can head online to start comparing the available alternatives to your current loan. While you are comparing loans you should keep some questions in mind like how much quicker will I pay off my loan if I switch to this alternative and how much will I be saving every month?

Depending on what features you are looking you may also wish to ask yourself if the loans you are considering will allow extra repayments, repayment holidays or any other feature you are interested in using.

refinancingprocess-infographic-v2

4. Calculate the switch cost

Once you have settled on a loan that you are interested in you can get an accurate picture of what your switch costs will be. For your existing loan, you should check if there is a discharge fee and how much this will be. If you have a fixed loan you will most likely also incur an added break fee for ending the fixed period early.

On the new loan that you wish to refinance to, you should check for upfront fees such as application and settlement fees that will be payable to set up the loan. By reading the product disclosure statement of the prospective loan closely you will be able to identify any hidden fees and costs that may be associated with the mortgage.

5. Calculate break even point

Close up of female accountant or banker making calculations

After you have settled on a loan that you think suits your refinancing aim well, and you have a good idea of the switch costs involved, you can use this information to calculate your break even point. This is the amount of time that it will take you to start seeing the benefit of your refinancing decision.

You can calculate what your break even point will be by using a mortgage calculator to estimate your monthly repayments with your new loan and the difference between this and your existing repayment. Then, add up your total switch costs and see how many months it will take you to “pay” these costs off with the difference in your new repayment size.

EXAMPLE – Marie looks into refinancing 

Marie has an outstanding loan amount of $400,000 at an interest rate of 4.5 per cent for a loan term of 25 years. She wants to refinance to a loan with a 4 per cent interest rate to reduce her monthly repayment size. Marie begins to compare loans online and picks out one that she likes. She looks into the switching costs involved and sees that the whole refinancing process is likely to cost $600 in fees.

 

Marie knows that her current monthly repayment size is $2,223 and uses a mortgage calculator to determine that her new repayment size will be $2,111. The difference between these is $112 so she divides the switching cost by this amount and finds that in just over five months she would reach her break even point and start to see the benefits of the switch.

 

You can also calculate how much you will save over five years to get a longer term idea of the benefits of switching loans.

6. Make a decision on RateCity.com.au

Now that you have all the facts together you can make a decision as to what you want to do. Refinancing may be the best option or you may prefer to contact your current lender and try and negotiate a better rate.

If you do decide to refinance you have the choice to switch lenders online or to engage the services of a broker to help you with the process.

Low rate refinance home loans

 

 

 

 

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Learn more about home loans

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.

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.

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. 

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.

How can I get ANZ home loan pre-approval?

Shopping for a new home is an exciting experience and getting a pre-approval on the loan may give you the peace of mind that you are looking at properties within your budget. 

At the time of applying for the ANZ Bank home loan pre-approval, you will be required to provide proof of employment and income, along with records of your savings and debts.

An ANZ home loan pre-approval time frame is usually up to three months. However, being pre-approved doesn’t necessarily mean you will get your home loan. Other factors could lead to your home loan application being rejected, even with a prior pre-approval. Some factors include the property evaluation not meeting the bank’s criteria or a change in your financial circumstances.

You can make an application for ANZ home loan pre-approval online or call on 1800100641 Mon-Fri 8.00 am to 8.00 pm (AEST).

Monthly Repayment

Your current monthly home loan repayment. To accurately calculate how much you could save, an accurate payment figure is required. If you are not certain, check your bank statement.

Interest Rate

Your current home loan interest rate. To accurately calculate how much you could save, an accurate interest figure is required. If you are not certain, check your bank statement or log into your mortgage account.

Savings over

Select a number of years to see how much money you can save with different home loans over time.

e.g. To see how much you could save in two years by switching mortgages,  set the slider to 2.

How can I calculate interest on my home loan?

You can calculate the total interest you will pay over the life of your loan by using a mortgage calculator. The calculator will estimate your repayments based on the amount you want to borrow, the interest rate, the length of your loan, whether you are an owner-occupier or an investor and whether you plan to pay ‘principal and interest’ or ‘interest-only’.

If you are buying a new home, the calculator will also help you work out how much you’ll need to pay in stamp duty and other related costs.

What's wrong with traditional ratings systems?

They’re impersonal 

Most comparison sites give you information about rates, fees and features, but expect you’ll pay more with a low advertised rate and $400 ongoing fee or a slightly higher rate and no ongoing fee. The answer is different for each borrower and depends on a number of variables, in particular how big your loan is. Comparisons are either done based on just today or projected over a full 25 or 30 year loan. That’s not how people borrow these days. While you may take a 30 year loan, most borrowers will either upgrade their house or switch their home loan within the first five years. 

You’re also expected to know exactly which features you want. This is fine for the experienced borrower, but most people know some flexibility is a good thing, but don’t know exactly which features offer more flexibility than others. 

What is the flexibility score?

Today’s home loans often try to lure borrowers with a range of flexible features, including offset accounts, redraw facilities, repayment frequency options, repayment holidays, split loan options and portability. Real Time Ratings™ weights each of these features based on popularity and gives loans a ‘flexibility score’ based on how much they cater to borrowers’ needs over time. The aim is to give a higher score to loans which give borrowers more features and options.

They’re not always timely

In today’s competitive home loan market, lenders are releasing new offers almost daily. These offers are often some of the most attractive deals in the market, but won’t get rated by traditional ratings systems for up to a year. 

The assumptions are out of date 

The comparison rate is based on a loan size of $150,000 and a loan term of 25 years. However, the typical loan size is much higher than that. Million dollar loans are becoming increasingly common, especially if you live in metropolitan parts of Australia, like Sydney and Melbourne. It’s also uncommon for borrowers to hold a loan for 25 years. The typical shelf life for a home loan is a few years. 

The other problem is because it’s a percentage, the difference between 3.9 or 3.7 per cent on a $500,000 doesn’t sound like much, but equals around $683 a year. Real Time Ratings™ not only looks at the difference in the monthly repayments, but it will work out the actual cost difference once fees are taken into consideration. 

What is an interest-only loan? How do I work out interest-only loan repayments?

An ‘interest-only’ loan is a loan where the borrower is only required to pay back the interest on the loan. Typically, banks will only let lenders do this for a fixed period of time – often five years – however some lenders will be happy to extend this.

Interest-only loans are popular with investors who aren’t keen on putting a lot of capital into their investment property. It is also a handy feature for people who need to reduce their mortgage repayments for a short period of time while they are travelling overseas, or taking time off to look after a new family member, for example.

While moving on to interest-only will make your monthly repayments cheaper, ultimately, you will end up paying your bank thousands of dollars extra in interest to make up for the time where you weren’t paying off the principal.

How much are repayments on a $250K mortgage?

The exact repayment amount for a $250,000 mortgage will be determined by several factors including your deposit size, interest rate and the type of loan. It is best to use a mortgage calculator to determine your actual repayment size.

For example, the monthly repayments on a $250,000 loan with a 5 per cent interest rate over 30 years will be $1342. For a loan of $300,000 on the same rate and loan term, the monthly repayments will be $1610 and for a $500,000 loan, the monthly repayments will be $2684.

What is a fixed home loan?

A fixed rate home loan is a loan where the interest rate is set for a certain amount of time, usually between one and 15 years. The advantage of a fixed rate is that you know exactly how much your repayments will be for the duration of the fixed term. There are some disadvantages to fixing that you need to be aware of. Some products won’t let you make extra repayments, or offer tools such as an offset account to help you reduce your interest, while others will charge a significant break fee if you decide to terminate the loan before the fixed period finishes.

How long does NAB home loan approval take?

The time required to get your home loan from NAB approved can vary based on a number of factors involved in the application process. 

Once you have applied for a home loan, a NAB specialist will contact you within 24 hours over the phone to take down relevant information, including your total income, debts (existing loans, credit cards, etc.), assets (car, shares, etc.), and your monthly expenses (food, utility bills, etc.). Your lender might also ask for information related to the property you want to purchase, including the type of dwelling and preferred postcode.

NAB will then verify all your information and check your credit score, and if the details stack up, you should be given a conditional approval certificate. This certificate stipulates how much money NAB is willing to lend you and is typically valid for 90 days. 

Once you have your conditional approval, you can start browsing for properties that you like and that fit within the budget that NAB has provided. After you find a suitable property, you’ll need to give a copy of the signed deed to NAB, following which you should get full approval and access to the funds. This process can take up to 4-6 weeks.