Refinance home loan comparison

The decision to refinance your mortgage may depend on several factors. If your equity in the property is less than 10% or 20%, refinancing may incur additional expenses. However, if your primary goal is to reduce your mortgage payments, refinancing to a loan with a lower interest rate could be a favourable choice. In such cases, exploring refinancing options could provide much-needed financial relief for your budget. 

Refinancing to a home loan featuring a reduced interest rate has the potential to make your monthly interest payments more easily affordable. Consequently, this could lead to potential savings over the entire lifespan of your loan. A thorough evaluation of the prospective advantages of refinancing can help you determine whether it matches your financial objectives and represents a viable strategy for improving your financial circumstances. 

Enjoy more flexible features

Refinancing your home loan can provide access to a range of flexible features, such as making extra repayments, using redraw facilities, or taking advantage of offset accounts. These features can improve your ability to manage your mortgage payments efficiently and tailor your loan to your specific needs. 

Reduce your monthly repayments

By refinancing to a loan with a lower interest rate, you can effectively lower your monthly mortgage payments, offering immediate financial relief and freeing up funds for other essential expenses or long-term financial objectives. However, it's important to keep in mind that while your monthly repayments may decrease, you might end up paying more interest over the entire loan term. 

Free up equity

If you've made substantial progress in repaying your home loan, you may have accumulated equity in your property. Refinancing can allow you to tap into this equity, potentially securing another loan or a line of credit. This newfound financial resource can be directed towards home renovations or other significant projects, providing you with a valuable source of funds. 

Consolidate debts

Refinancing also offers the opportunity to consolidate outstanding personal loans or credit card balances into your mortgage. By doing so, you can take advantage of the typically lower interest rates associated with home loans, potentially reducing your overall interest payments in the short term. This strategy can simplify your debt management and help you regain control of your finances. 

When you consolidate debts into your mortgage, you are essentially turning unsecured debts (like credit cards) into secured debts tied to your home. But you may run the risk of losing your home if you can’t keep up with your repayments. Additionally, while interest rates on home loans are often lower, stretching the repayment period for short-term debts, like credit cards and personal loans, may result in paying more interest over the life of the loan. Remember to carefully weigh the benefits against the risks and ensure that refinancing aligns with your long-term financial goals. 

Find a lender that treats you better

A lender who values you as a customer is more likely to provide personalised and attentive service. They will take the time to understand your specific financial needs and goals, resulting in a loan solution that is better tailored to your circumstances. Finding a lender that treats you better can lead to a more pleasant borrowing experience, better loan terms, and a stronger customer-lender relationship. 

If you’re unhappy with your bank’s customer service, refinancing may offer you the opportunity to switch to a lender with improved circumstances. 

Grab a cashback deal

Some lenders offer special discounts and other benefits to new customers, from reduced interest rates to cashback deals. Cashback offers generally range from $2,000 - $3,000, depending on the value of your property. However, as tempting as cashback deals may seem, they can sometimes come at a cost. 

Remember that nothing comes for free in the world of debt. Refinancing rebates or cashback deals offered by lenders could sometimes be marketing gimmicks designed to secure your business. 

While that fact shouldn’t stop you from exploring cashback deals to pocket more savings, remember to consider more than just the discount or cashback offered by the lender, and compare home loan interest rates, fees and features, to find the best possible deal for you and your situation in the long run. 

Deciding whether to refinance a home loan depends on your specific financial goals. Refinancing can offer benefits like lower monthly payments, access to equity, or improved customer service. However, it's crucial to weigh these benefits against associated costs. For example, if you're close to the end of your term, refinancing may not be ideal as it could extend your mortgage, potentially leading to higher interest charges over the new term. Additionally, if you're in the middle of a fixed period, break fees from refinancing could significantly increase your costs. Consider these factors carefully before making a decision. 

When you refinance a mortgage, you’ll be applying for a new home loan again. Meaning, you will need to meet the strict lending criteria set by the lender and present a healthy financial situation in your application.  

The lender will be taking stock of key factors when assessing your application, including the purpose of your refinance, your reliability as a customer as well as your credit score. 

The purpose of your refinance

Your refinancing goal may impact the type of new mortgage that a lender will offer you. For example, if you’re refinancing to gain access to competitive features, you may be offered a variable rate loan with a higher interest rate than the lender’s no-frills, basic home loan options. A home loan with features is typically reserved for variable rate products only, and can often incur higher charges than more basic products. 

Reliability and your credit score

The lender needs reassurance that you can comfortably service your mortgage repayments without risk of late payment or default. This is determined by assessing your income, expenses and creditworthiness. 

When you apply for your new home loan, you will again need to submit personal details, such as recent payslips, tax returns, recent bank statements, a list of your ongoing expenses, any existing liabilities, such as a car loan. 

The lender will assess this information to make sure you can afford the potential new mortgage repayments at the current interest rate, as well as a higher ‘buffer’ interest rate - typically 2-3% higher than its standard variable rate. As interest rates will fluctuate over a 20-30 year loan term, lenders must determine you can meet your repayments on a higher interest rate. 

The lender also performs a hard credit check on your credit file to assess your creditworthiness, and ensure you are the ideal customer to service this new mortgage. If your credit score is sitting in a healthy category, between very good and excellent, you are more likely to gain approval for the refinance. If your credit score has fallen since you last applied for your mortgage, you may find it harder to gain loan approval. 

Loan-to-Value Ratio (LVR)

The LVR refers to the ratio of your outstanding loan amount to your property’s current value. Lenders could have maximum LVR requirements for home loans, typically around 80%. If your LVR exceeds this threshold, it could lead to higher interest rates, or you may need to pay for Lender’s Mortgage Insurance (LMI).

When refinancing, it’s important to consider your property’s current value and how it may impact your LVR. If your LVR exceeds the lender’s designated threshold, you could anticipate potential LMI costs even if you previously paid for LMI when obtaining the original loan.

The cost of LMI varies according to your loan amount but it could add thousands of dollars to your refinancing costs.

Thinking about refinancing your home loan can be a smart move if your current mortgage is weighing you down with high costs or if you're feeling the pinch of mortgage stress. Refinancing opens the door to other lenders who might offer better deals with lower interest rates, no ongoing fees, and extra perks that suit your financial goals and long-term plans. Switching to a new lender could potentially trim your rates, giving your finances a much-needed boost. 

However, the timing of refinancing is crucial. For many borrowers, the decision to refinance can be as straightforward as reaching the end of their fixed rate period. It's generally not advisable to switch home loans during a fixed rate period due to potential break charges from your current lender. But when this fixed period is up, it could be the time to explore other options. 

For some borrowers, the decision depends on market conditions and interest rate trends. Staying informed about the current economic landscape and seeking advice from mortgage experts can provide valuable insights into whether it's the right moment to refinance. 

When contemplating a home loan refinance, it's important to carefully evaluate your individual circumstances, financial objectives, and the terms offered by prospective lenders. Factors such as interest rates, repayment terms, loan features, and associated costs should all be taken into consideration.

Thorough research and seeking professional advice, perhaps from a mortgage broker, can help you in making an informed decision about whether refinancing is suitable for your specific situation. Regularly following the RBA cash rate updates to see how it's impacting home loans interest rates could help you secure a competitive deal. 

The exact paperwork you’ll need to refinance a home loan will depend on the lender, but some of the common requirements include: 

• Past mortgage statements: To confirm your current interest rate, your equity, and how much is left on your mortgage
• Employment details and payslips: To confirm your income and employment status
• Identification details: To confirm your identity and residence
• Details of any other assets or liabilities: To provide a clear picture of your financial status
• Bank statements: To confirm your income and regular living expenses