Should I refinance?
If you’ve got a home loan, you may have come across the terms ‘refinancing’ or ‘re-mortgaging’. In essence, they refer to the process of switching home loans for the purpose of saving money, increasing flexibility, adding to the loan amount or consolidating debts.
Refinancing has become particularly popular in a low interest rate world because the variance between high interest rate lenders and low interest rate lenders is significant, according to RateCity data. What does this mean? Say a borrower had a $600,000 home loan with a rate of 4.5 per cent over 30 years. If they refinanced to a 3.9 per cent rate, they would stand to save $210 a month.
Here are some of the reasons refinancing is popular among borrowers:
The reasons borrowers refinance
- To reduce their loan costs – Refinancing saves some borrowers money on a monthly basis, but also over the life of a loan. The actual amount saved will depend on a number of variables, including the size of the loan, the rate discount and any ongoing and administration fees. If your goal is to reduce your monthly repayments you can user RateCity mortgage repayment calculator to see how much you could save by refinancing every month.
- To increase flexibility or features – When you first applied for your home loan, you may have been driven other factors than those that drive you now. Perhaps you were in a lower paying job or a job that paid you monthly or maybe you have since come into an inheritance. If you were simply looking for the lowest rate at the time, you may have missed out on a number of popular features lenders now provide, including offset accounts, redraw facilities and the ability to make extra repayments. If you can afford to pay down your loan quicker, then these functions may save you over the longer term.
- To free up some equity – If you’ve paid off a chunk of your home loan, you may be eligible to extend your borrowing amount with a line of credit. The benefit here is that you could be paying a lower amount of interest via your home loan than you would if you had a credit card. Taking on additional debt always carries risks though, so before you go down this path, be sure to speak to a professional, such as a financial adviser, about the pros and cons for your personal situation.
- To consolidate debts – Some borrowers have multiple streams of debt. They may have multiple housing loans, personal loans and credit card debt. By syphoning those debts into the one account, they may be in a position to save, depending on the level of debt they have.
- To find a lender that treats them better – It’s not unusual for borrowers to claim they’ve felt neglected by their lender. Perhaps that means not getting a call back when they request it, poor customer service at a branch, poor notification of changes or not passing on interest rate reductions. Feeling disenchanted with a lender is a common reason for refinancing for many Australians. It’s important to make sure before you switch loans that your new lender is an improvement on the old one. For many that means making sure communication is strong and interest rates and fees remain low.
- To take advantage of incentives – From time to time, lenders offer incentives to try and hook new borrowers. These incentives can be quite generous and range from cashback offers, to holidays, to new cars. Before you refinance to take advantage of an incentive, it’s important to look at the fine print and make sure the interest rate and fees for the new loan are reasonable and aligned to your financial goals. It’s worth using a repayment calculator to determine how much more you’ll pay monthly, yearly and over the life of the loan, if your interest rate is higher than your current rate.
The reasons borrowers don’t refinance
- The time/effort involved – The main reason people don’t refinance is because they can’t be bothered, due to the perceived effort for the amount they’ll save. A RateCity survey found almost 40 per cent of borrowers cite this as a barrier. In reality refinance does not require much of the borrower and in sum cases can be completed in 3 days.
- The chance the new lender will be worse than the old one – Any change is a risk and for almost a quarter of borrowers, the risk the new lender won’t be any better is enough of a reason for them to stay put.
- The hassle of unlinking bundled products – For those who have several bank products, including credit cards, transaction accounts and term deposits, linked to the one lender, it can be a daunting task to either switch them all over to the new lender or to set up a new direct debit to your mortgage. However, many smaller lenders recognise this and have upped the ante on their customer service for bundled products. It can be as simple as filling out one form with your new lender and getting them to take care of a lot of the heavy lifting. It’s worth checking before you sign up to any new loan what sort of customer service the lender provides and how they handle mortgage transactions.
- The associated costs – Surveyed home owners cited the switching costs as one of their major deterrents to moving lenders. Their rationale is that the cost of moving would outweigh the benefits they receive. However, in many cases, that’s not correct. ‘Exit costs’ were banned in 2011, which means borrowers now only have to worry about a discharge fee and the upfront fee of their new loan. While discharge fees tend to hover around the $200-$300 mark, the average upfront costs from RateCity’s database of loans is $396. However there are more than 1200 loans on RateCity.com.au with no upfront fees at all.
How much does it cost to refinance?
The costs you may encounter when refinancing are as follows:
- Discharge fees (average: $250) – When you terminate your loan, you will likely have to pay a discharge fee to cover the paperwork your old lender has to compile.
- Upfront costs (average: $400) – these include establishment fees, valuation and settlement costs.
- Break fees - if your current home loan is on a fixed rate you should contact your lender first and find out the break fee associated with switching.
When considering the so-called switch cost, it is important to examine it with respect to the savings. A common question many borrowers ask is:
"How long will it take me to return the switch cost and what will be my total saving in the first year?"
Some lenders will cover your discharge cost and forfeit the up front cost to earn your business. It could be worth negotiating those fees before signing the loan contract.
How much time does it take to refinance?
- Fast track: Lenders offering a fast refinancing track can complete the entire process for you within 3 days.
- Standard process: The standard refinancing process usually takes between two to four weeks. This process does not require more effort on your behalf, it just structured differently.
Those are the key actions on your part thoughout the refinancing process:
1. Choose your loan (Estimate: 15 mins – 1 hour)
Once you’ve committed to the refinancing process, use RateCity.com.au to locate your ideal loan based on your personal set of criteria.
2. Make contact with your new prospective lender (Estimate: 30 mins to 1 hour)
Once you’ve chosen the new loan you wish to move to, it’s time to make contact with the lender to discuss your desires and suitability. Most lenders can be contacted by phone or through the chat function on their site, where they will often request to call you at a convenient time. In your consultation, they will ask you about your reasons for refinancing, your property, your loan amount, your equity, your suburb, your employment details and potentially your future plans for the property. The reason they ask these questions is to ascertain whether you’re a suitable candidate from their perspective for finance.
It’s important at this stage to confirm how your lender deals with employment loss, default and whether they offer repayment holidays. It’s also a good time to talk about fees you will be charged at the onset and termination of the loan, as well as any ongoing charges.
3. Start the application process (Your time commitment estimate: 1 hour- 8 hours depending on personal finance situation)
If your new prospective lender has deemed you a suitable candidate and you’ve deemed them a suitable lender, you can proceed to the next stage of preparing your paperwork. The documents you will need include, but may not be limited to: identification details, your past loan statements, employment letters and pay slips. Some lenders require this paperwork to be delivered in person and sighted by a Justice of the Peace, others accept documents scanned online, others accept documents by post. Confirm their desired methods and then send them off.
4. Get your valuation (Your time commitment estimate: 1- 3 hours to find a suitable time and minimal property preparations)
One of the last suitability checks your lender will require is a valuation of your property. This is primarily done to ensure you have enough equity to secure the loan. Sometimes lenders will also want to ensure your geographical region is increasing in value in case they have to repossess and sell your property. Essentially they want to know they can recoup their investment.
How the property will actually be valued varies by lender. Some lenders will want someone to look inside, others will be comfortable driving by, others can do the evaluation remotely. It’s worth noting many borrowers get their first valuation free, but that’s usually redeemed when you first settle. You will likely be charged a valuation fee when you refinance, which is usually between $100 and $400.
If the valuation determines you have less than 20 per cent equity, you may be required to pay lenders’ mortgage insurance on your new loan.
5. Receive your approval or rejection from lender (Your time commitment estimate: N/A)
Within a few hours to a few days, your prospective lender will be in touch to let you know the status of your application. If you are approved, you proceed to the next stage of transferring the title from the old lender to the new lender.
If you are rejected, it’s worth getting back in touch with the lender to see what happens next. If you have been rejected because you do not have enough equity in your property, you may be able to pay additional insurance to secure the loan or secure it against a different type of equity. Some lenders also have valuation appeal processes.
6. Transfer your loan (Your time commitment estimate: 30 mins to 1 hour)
After your loan has been approved, you will need to sign some discharge paperwork and then your existing mortgage is transferred to your new lender. This process can take up to two weeks. At this stage, you may pay a discharge fee.
7. Settlement of your new loan (Your time commitment estimate: 30 mins to 1 hour)
Your final stage of refinancing, the settlement involves paying your upfront fees and setting up your mortgage direct debits.
NOTE: Your time commitment estimate is how long our survey results indicate how many hours of your time will be taken up with each stage. It does not include wait times you may incur as your lender assesses your application.
What do I need to refinance?
- Past loan statements;
- Employment details & payslips;
- Identification details- passport, driver's licence.
The process of switching mortgages
The precise process and timeline you will follow when you switch loans varies depending on the lender you choose, your past lender, the ease of your valuation and how readily available your documentation and personal finances are. However, it should follow a similar format to this:
1. Define your refinance goal: Do you want to reduce your monthly repayments? Pay off your loan quicker? Get cash out of the property? Consolidate debts? The goal will determine what information and paperwork you need to source.
2. Find your loan details: In order to calculate accurately how much you can save by switching it is important you will find out five things:
- Your current interest rate;
- Your outstanding mortgage balance;
- Your monthly repayment;
- The value of your property;
- Discharge fee.
3. Compare to alternatives: Use solutions such as RateCity mortgage repayment calculator to compare your current loan to market alternatives.
4. Switch cost: Check the upfront fees on relevant loans and check if the new lender is willing to cover your discharge fee and/or forfeit the upfront fee.
5. Calculate break even point: Compare your monthly savings against the switch cost and calculate the amount of time it will take to recoup that initial cost and start saving.
6. Make your decision: Based on the information at hand, decide if you do indeed wish to switch lenders. If the answer is yes, you can choose to use a mortgage broker or apply online via a website.
Top refinancing questions
Refinancing, or switching loans, is not free, however many borrowers do it because of the potential to save money over time.
The total cost of refinancing is estimated between $400 and $1200, based on the breadth of establishment, valuation, settlement and discharge fees from the existing loan. It will vary on a case by case basis, which means before refinancing, prudent borrowers should ask their prospective lender for a cost estimate and use a refinancing calculator to calculate how long it would take to recoup those costs.
The frequency of refinancing is a personal choice, based on a number of variables for every individual. As such, there is no ideal equation for whether a borrower should refinance and how often they should refinance.
RateCity data shows home owners with 30-year loan terms tend to refinance every four to five years on average.
In your research on refinancing, you may have come across the term ‘no cost refinancing’. No cost refinancing sometimes occurs in the US and refers to a situation where the lender or the broker covers the associated costs, such as appraisal fees and settlement costs.
Unfortunately, in Australia, we don’t really have no cost refinancing. The typical cost of refinancing is a few hundred dollars. However, it is still very popular, especially for borrowers with lengthy loan terms who can recoup those costs over a few months.
Refinancing is certainly not for everyone; in fact for some borrowers, it will be not applicable or not appropriate.
For example, the following cohorts would find little benefit in refinancing:
- Borrowers who are happy with their current rate, fees and level of debt;
- Borrowers in the final year of their loan term – This is because the costs of refinancing could outweigh the financial benefit;
- Borrowers with a small loan amount – The fees may be more than the actual loan;
- First home buyers – There is no reason to refinance when you’re buying for the first time, but it is a good time to search for a good deal so you don’t have to refinance.
While there is no ideal time of year to refinance, reduced interest rates tend to follow a Reserve Bank interest rate cut. For example, in 2016, several loans listed on RateCity dropped their rates around May. Some home loan specials also tend to appear around the beginning of a new year.
Given the paperwork involved in switching loans, some borrowers like to time their refinancing around holidays or long weekends.
RateCity is a financial comparison website, which means while we provide you with a list of prospective loans and lenders, we can not refinance for you.
If you wish to outsource the refinance process, a mortgage broker may be able to help.
To read more about RateCity’s services, click here.
It is possible when you tell your current lender you have found a new lender with a better rate and/or better fees, your current lender will try to persuade you to stay. After all, your current lender is making money from your business over a long period of time and should want to retain that.
Before you begin the refinancing process, it could be worth speaking to your current lender about whether they are offering flexibility on rates or fees. Lenders are well known to negotiate in order to keep customers. It’s best to go into this process armed with information about comparable loans with low rates or fees and similar features to the ones you currently have.
Read More: How to negotiate a better deal
Given that the refinancing process can take up to a month from initial investigation to loan transfer, some borrowers could find it coincides with a recruitment process. If this is the case for you, you should definitely let your new lender know early in the application process. While it varies by lender, most lenders require refinancers to be in a permanent job with the same employer for at least 6 months before refinancing. Any interruption to this could reduce your chances of successfully completing the refinancing process.
Some lenders will allow you to refinance if you are on an employment contract, as opposed to in an ongoing role. However, many lenders prefer you to be in an ongoing role because it reduces the risk that you will be unable to meet your repayments.
While some lenders do not require you to get a valuation before refinancing, the majority do. Rare exceptions may include when there’s been a recent estimate of a neighbouring property or a recent valuation of your property. In other cases, the lender will require a professional estimate of your property’s worth in order to establish how much they can safely lend you.
On some occasions, the estimates are done remotely based on current knowledge of the geographical region, property size and condition. In other cases, someone will come to your home to value it.
More burning questions
If your deposit was less than 20 per cent of your property’s value when you took out your original loan, you may have paid lenders’ mortgage insurance (LMI). LMI protects the lender in the scenario you are unable to repay your loan or recoup your borrowing costs due to low equity. For some borrowers, it’s a charge of up to $30,000.
If you had a deposit below 20 per cent and have held your property for less than five years, there is a chance you could have to pay LMI again, to your new lender, upon refinancing. Before completing the application, ask your prospective lender whether this is the case.
Some borrowers delay refinancing to avoid paying LMI a second time because the financial benefits do not outweigh the costs.
There is no set limit to how many times you are allowed to refinance. Some surveyed RateCity users have refinanced up to three times.
However, if you refinance several times, it could impair your credit score. Lenders assess your credit score when you apply for new loans, so if you damage it, you may not be able to refinance if and when you really need to.
Before refinancing multiple times, you should get a copy of your credit report and ensure it’s in good shape for future refinances.
Some lenders still allow you to refinance if you have impaired credit. However, you may pay a slightly higher interest rate, higher fees or lenders’ mortgage insurance. When you take out a home loan, the lender wants a high level of probability that you will repay the loan. Reviewing your credit score is one of the key ways they ascertain that level of probability. If it is impaired, they seek another type of compensation in lieu of that high probability.
You should only apply to one lender at a time because you could end up in a scenario where you are accepted by multiple lenders and expected to pay multiple application fees.
If you are having trouble comparing two similar loans, it’s worth making a list of your needs and desires in a home loan and numbering them in order of importance. Then, contact the two lenders and give them a score on how they measure on each of your important criteria.
Unfortunately, you won’t be able to estimate the value of your home yourself.
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.
If you wish to return to your previous lender, you will have to go through the refinancing process again and pay a second set of discharge and upfront fees.
Therefore, before you refinance, it’s important to weigh up the new prospective lender against your current lender on a number of areas, including fees, flexibility, customer service and interest rate.
If you intend to sell in the next few months, it may not be the best time to refinance. That’s because the costs associated with refinancing, including upfront fees for the new loan and the old loan’s discharge fee, often take at least a couple of months to recover, even if you move to a loan with a better interest rate and lower fees.