Why should you refinance?

Why should you refinance?

If you’ve been reading about how more Australians are refinancing their home loans this year, and how many mortgage lenders have been slashing their fixed and variable interest rates, you may be wondering if you should also think about refinancing your mortgage.

There are many different reasons why people choose to refinance their home loans, with each person’s decision being based on their own unique circumstances. Here are a few popular reasons why some people choose to refinance, to help you work out if one or more may apply to you at this time.

Your loan has changed

Were you on a home loan with a fixed interest rate? Did you get a discount on your variable rate as an introductory bonus offer? Once these offers come to an end and you switch to your loan’s revert rate, you may find that your repayments are nowhere near as affordable as they used to be.

Refinancing to a mortgage with a lower rate could help to keep your repayments more manageable, limiting the impact on your household budget.

You want to consolidate other debts

Do you have outstanding debts owing on credit cards or personal loans? Are the interest charges on these debts eating up a significant chunk of your budget each month?

Refinancing may let you borrow a bit more money in order to pay off these outstanding debts in one fell swoop, effectively consolidating your credit card or personal loan debts into your home loan. Because home loan interest rates are generally lower than those on credit cards and personal loans, you’ll likely pay less in interest each month, easing some pressure on your budget.

However, it’s important to remember that because home loans are paid off over much longer terms than most personal loans and credit cards (decades, compared to months), you’ll risk paying much more in total interest on your smaller debts by following this strategy. You may lower this risk by taking steps to make extra repayments and clear the extra money quickly.

You just want a better rate and/or to pay less

Even if you got the lowest home loan rate available when you first applied for your home loan, it’s unlikely that you’ll still have the lowest rate on the market after a few years have passed. If you still want to keep your home loan’s repayments competitive, every few years you may want to compare the home loan market and see if you can get a better rate.

You could try contacting your home loan provider and see if you can negotiate a discount. Depending on how you go, the next step could be to contact a competing mortgage provider and look at their refinancing options.

You want to be treated better

Unfortunately, not every customer receives the level of customer service they expect. If you’re not a fan of the time you spend on hold when you call your bank, or if their online banking systems are driving you up the wall, you may consider refinancing so you can switch to a lender that treats you better.

You want to use your equity

Once you’ve been paying your home loan for a few years, you’ll likely have built up some equity in your property. This can be especially true if property prices have risen in your area, and your home’s value has increased.

This equity can be used as security when you refinance, and may help you get a lower interest rate. Depending on your circumstances, you could also use your equity to secure a line of credit (basically similar to a credit card with a limit based on your equity), which you could use to pay for renovations, or buy a car at a lower rate than many car loans. It may also be possible to use your equity in one property to help you secure a loan on another investment property, though there are several risks involved with this sort of strategy.  

Your lifestyle has changed

Ever since you first got your home loan, more than a few things may have changed in your life. You may have started a family. You may have started or ended a relationship. You may have lost your job, or gotten a better-paying one.

If the home loan you originally applied for no longer suits your current needs, you may want to think about refinancing to a mortgage that more closely matches your finances and lifestyle.

You want to pay your loan off faster

The sooner you can get out of debt, the less money you’ll need to pay in interest charges. Refinancing to a home loan with a shorter loan term will mean more expensive monthly repayments, but you’ll pay less in total interest on your mortgage.

You could also refinance to a home loan that offers the option of making extra home loan repayments. These can help reduce the principal amount owing on your home loan, which can shrink your interest charges and bring you closer to exiting your loan early.

You want a home loan with more (or fewer) useful features and benefits

When you first applied for your home loan, you may have been limited in what mortgage features and benefits you could access. But by refinancing, you could benefit from:

  • Extra repayments
  • Redraw facility
  • Offset account
  • Loan portability
  • Repayment holidays

Refinancing to a home loan with features and benefits that match your personal financial situation could make a big difference to the level of value you enjoy.

On the other hand, the more features and benefits a home loan offers, the more it’s likely to cost in fees and interest charges. If your current home loan includes features and benefits that you aren’t really using, you may enjoy more value by switching to a more basic “no-frills” home loan.

You’re in financial stress

If you’re struggling to pay your home loan at present, switching to a cheaper loan could be one way to ease some of the pressure. However, because refinancing effectively means getting a whole new loan, this could make it more difficult to get a mortgage approved with a new lender, depending on your exact circumstances.

Consider contacting a mortgage broker or a financial counsellor before choosing to refinance your mortgage, to make sure the decision will be right for your needs. Also, remember that refinancing may involve paying a range of fees and charges – make sure the benefits will be worth the costs.

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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.

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. 

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.

Can I change jobs while I am applying for a home loan?

Whether you’re a new borrower or you’re refinancing your home loan, many lenders require you to be in a permanent job with the same employer for at least 6 months before applying for a home loan. Different lenders have different requirements. 

If your work situation changes for any reason while you’re applying for a mortgage, this could reduce your chances of successfully completing the process. Contacting the lender as soon as you know your employment situation is changing may allow you to work something out. 

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.

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.

What are the responsibilities of a mortgage broker?

Mortgage brokers act as the go-between for borrowers looking for a home loan and the lenders offering the loan. They offer personalised advice to help borrowers choose the right home loan for their needs.

In Australia, mortgage brokers are required by law to carry an Australian Credit License (ACL) if they offer credit assistance services. Which is the legal term for guidance regarding the different kinds of credit offered by lenders, including home loan mortgages. They may not need this license if they are working for an aggregator, for instance, as a franchisee. In both these situations, they need to comply with the regulations laid down by the Australian Securities and Investments Commission (ASIC).

These regulations, which are stipulated by Australian legislation, require mortgage brokers to comply with what are called “responsible lending” and “best interest” obligations. Responsible lending obligations mean brokers have to suggest “suitable” home loans. This means loans that you can easily qualify for,  actually meet your needs, and don’t prove unnecessarily challenging for you.

Starting 1 January 2021, mortgage brokers must comply with best interest obligations in addition to responsible lending obligations. These require mortgage brokers to act in the best interest of their customers and also requires them to prioritise their customers’ interests over their own. For instance, a mortgage broker may not recommend a lender who gives them a commission if that lender’s home loan offer does not benefit that particular customer.

How can I pay off my home loan faster?

The quickest way to pay off your home loan is to make regular extra contributions in addition to your monthly repayments to pay down the principal as fast as possible. This in turn reduces the amount of interest paid overall and shortens the length of the loan.

Another option may be to increase the frequency of your payments to fortnightly or weekly, rather than monthly, which may then reduce the amount of interest you are charged, depending on how your lender calculates repayments.

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.

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.

How can I get a home loan with bad credit?

If you want to get a home loan with bad credit, you need to convince a lender that your problems are behind you and that you will, indeed, be able to repay a mortgage.

One step you might want to take is to visit a mortgage broker who specialises in bad credit home loans (also known as ‘non-conforming home loans’ or ‘sub-prime home loans’). An experienced broker will know which lenders to approach, and how to plead your case with each of them.

Two points to bear in mind are:

  • Many home loan lenders don’t provide bad credit mortgages
  • Each lender has its own policies, and therefore favours different things

If you’d prefer to directly approach the lender yourself, you’re more likely to find success with smaller non-bank lenders that specialise in bad credit home loans (as opposed to bigger banks that prefer ‘vanilla’ mortgages). That’s because these smaller lenders are more likely to treat you as a unique individual rather than judge you according to a one-size-fits-all policy.

Lenders try to minimise their risk, so if you want to get a home loan with bad credit, you need to do everything you can to convince lenders that you’re safer than your credit history might suggest. If possible, provide paperwork that shows:

  • You have a secure job
  • You have a steady income
  • You’ve been reducing your debts
  • You’ve been increasing your savings

Will I be paying two mortgages at once when I refinance?

No, given the way the loan and title transfer works, you will not have to pay two mortgages at the one time. You will make your last monthly repayment on loan number one and then the following month you will start paying off loan number two.

Does Australia have no cost refinancing?

No Cost Refinancing is an option available in the US where the lender or broker covers your switching costs, such as appraisal fees and settlement costs. Unfortunately, no cost refinancing isn’t available in Australia.

Can I get a home loan if I am on an employment contract?

Some lenders will allow you to apply for a mortgage if you are a contractor or freelancer. However, many lenders prefer you to be in a permanent, ongoing role, because a more stable income means you’re more likely to keep up with your repayments.

If you’re a contractor, freelancer, or are otherwise self-employed, it may still be possible to apply for a low-doc home loan, as these mortgages require less specific proof of income.