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What is refinancing?

Refinancing or re-mortgaging a home loan refers to switching from one mortgage to another, often with a different bank or mortgage lender.

Why should I refinance?

There are many different reasons to consider refinancing a home loan, whether you're an owner-occupier or the owner of an investment property. Some of the most popular include:

  • To reduce your loan costs:Refinancing to a home loan with low rate may help make your interest repayments more affordable, and allow you to save money over the life of the loan.
  • To enjoy more flexible features: Switching to a home loan that allows you to make extra repayments, or access redraw facilities or offset accounts may allow you to better manage your mortgage payments. These loan features may help you to pay down your loan more quickly and save money over the longer term.
  • To free up some equity: If you’ve paid off a chunk of your home loan, you may be able to use this equity to secure another loan, such as a line of credit. This could help you pay for renovations or other major projects.
  • To consolidate debts: If you have outstanding personal loans or credit cards, you may be able to add these debts onto your mortgage to pay off over time. This may help you pay less interest in the short term, thanks to the generally lower interest rates of home loans, though paying these debts off over a longer term means you may pay more interest in total.
  • To find a lender that treats you better: If you’re unhappy with your bank’s customer service, refinancing may let you switch to a lender that listens to you. As well as banks, there are a range of non-bank mortgage providers to choose from. This includes online-only lenders, which don’t have branches to visit, but may often offer better interest rates.
  • To take advantage of incentives: Some lenders offer special discounts and other benefits to new customers, from reduced interest rates to cashback deals. Refinancing to a new lender may let you enjoy these special benefits, though it’s important to compare the value they offer to the home loan product's overall cost before making a decision.

When is a good time to refinance my home loan?

The best time for you to refinance your home loan will depend on your personal and financial circumstances, as well as your refinancing goals. 

If you believe you’re paying too much for your current home loan, and that the interest rate, ongoing fees, features and benefits offered by another lender may better suit your personal goals and financial needs, now and in the future, refinancing could be worth considering.

If you have a fixed rate home loan, your loan may revert to a higher variable rate when the fixed rate term comes to an end. You may be able to refinance to a lender offering a lower rate than your current lender's revert rate.

Remember that if you have less than 20 per cent equity in your property (also known as having a loan to value ratio or LVR higher than 80 per cent), you’ll likely have to pay Lenders Mortgage Insurance (LMI) when you refinance, even if you’d already paid LMI previously when you applied for a loan with a low deposit. If you’d prefer to avoid having potentially thousands of dollars added to the cost of your refinance, you may want to wait until you've built up more equity before you refinance.

How long does it take to refinance?

The refinancing process in Australia typically takes between two and four weeks, depending on your situation and the lenders involved.

However, some lenders offer a Fast Track refinance option, which may allow refinancers to switch loans in as little as three days.

Even though refinancing can require some of your time and effort, the potential benefits could make a significant difference over your remaining home loan term.

How much does it cost to refinance?

Refinancing isn’t free, but the benefits of refinancing may help to make up for its costs.

When you refinance, you may have to pay the following:

  • Discharge fees (average $300): Covers the paperwork when you end a home loan, including when you switch to a new lender.
  • Upfront fees (average $570): Covers the admin cost of setting up your new home loan.
  • Valuation fee (varies): Covers the cost of valuing the property as part of the mortgage application process.
  • Break costs (varies): If your existing home loan is on a fixed interest rate, you may need to pay a fee to refinance from this arrangement.
  • Lender’s Mortgage Insurance (LMI) (varies): An insurance policy that covers the lender (not the borrower) against the risk that you’ll default on your mortgage repayments. Charged when your deposit and/or equity used to secure a loan is less than 20 per cent of the property value. The less security you can provide, the more the LMI may cost.

Before you refinance, consider working out the total cost of switching mortgages, and estimate how long it may take for the savings on your new loan to make up the difference.

TIP:

A home loan's comparison rate combines its interest rate with its application fees and standard charges, giving you a better idea of its overall cost at a glance. However, not every charge is included in the comparison rate, so it's still important to conduct a detailed comparison.

Is refinancing worth the cost?

If refinancing your mortgage would let you enjoy more value from your mortgage, depending on your financial goals, then you may consider refinancing to be worth the cost. 

One simple way of estimating the value of refinancing is to look at the savings on interest, fees and other charges compared to your original loan. The sooner these savings make up for the cost of switching, the more value the loan may offer you, depending on what other features and benefits it may offer. 

Some mortgage lenders also offer cashback deals and similar incentives to customers who refinance with them. If you compare the value of the cashback deal or special offer to the cost of refinancing, and you come out ahead, you may consider refinancing worth the cost, depending on your situation. 

A mortgage broker may be able to help you work out if your home loan refinance would be worth the cost in relation to your financial situation.

TIP:

Some lenders may offer to cover your discharge fees and/or forfeit their upfront fees to earn your business. It could be worth negotiating your fees before signing a loan contract.

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Who offers refinancing home loans?

In theory, almost any home loan from any mortgage lender could be used for refinancing. That said, many lenders offer home loans that are specifically structured for refinancers. Some lenders also offer incentives such as cashback to encourage borrowers to refinance with them.

A refinancing home loan may have a lower LVR than a typical home loan (e.g. 70% or even 60% compared to 80%) as part of its eligibility criteria as it’s expected that a borrower who is refinancing has had the opportunity to build up equity in their property. This means that a refinancing home loan is more likely to have a lower interest rate, and/or offer features and benefits that may suit refinancers.

A refinancing home loan may allow the borrower to borrow more money in order to renovate the property or spend on other projects. This could involve increasing the mortgage balance (which could mean the mortgage may take longer to pay off, increasing the total interest cost), or offering access to a flexible line of credit.

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What are the pros and cons of refinancing?
  • Potentially pay off your mortgage sooner
  • Get a loan that better suits your needs
  • Access equity
  • Refinancing to a longer loan term could cost more
  • May need a lower LVR
  • Fees and charges may affect the total value

How do I refinance my home loan?

The process of refinancing a home loan is a lot like applying for a whole new mortgage, though some of the steps and requirements may be slightly different to when you applied for your first home loan. 

Even if you’ve applied for a mortgage before and are familiar with the steps involved, you may still find help from a mortgage broker valuable. These home loan specialists can take you through what’s required for your refinance, including any terms or conditions you may otherwise have missed. They may also help streamline the application process to help you save time and hassle.  

What do I need to refinance?

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 e.g. passport, driver’s licence etc.: To confirm your identity and residence
  • Details of any other assets (e.g. cars, boats, other valuables) or liabilities (e.g. personal loans, car loans, credit cards): To provide a clear picture of your financial status
  • Bank statements: To confirm your income and regular living expenses
TIP:

When you tell your current lender you have found a new loan with a better rate and/or better fees, your current lender may try to persuade you to stay.

Before you start planning to refinance, you may want to speak to your current lender about their flexibility on rates or fees, and see if they’re willing to negotiate to keep your business.

What are the steps of refinancing?

  1. Define your refinance goal: Do you want to reduce your home loan repayments? Pay off your loan quicker? Get cash out of the property? Consolidate debts?
  2. Find your current loan’s details: This includes your current interest rate, loan amount, and monthly repayment, as well as the current value of your property and the discharge fee on your current loan.
  3. Compare alternative home loans: Compare interest rates, annual fees, features and benefits, as well as eligibility requirements and lending criteria, and consider which loan options may be able to help you achieve your goals. If you need help, you can use a comparison website, or contact a mortgage broker.
  4. Work out your switch cost: Check what fees and charges you’ll need to pay to exit your current loan and switch to a new loan offer. You could also try to find out if a new lender would be willing to cover your discharge fee and/or forfeit its upfront fee to earn your business.
  5. Calculate break-even point: Work out how much you could save per month by switching to a cheaper home loan, then work out how long it would take for these savings to make up the switch costs.
  6. Make your decision: Based on the information at hand, decide if you still want to switch lenders, and which mortgage you’d like to choose.
  7. Apply: Contact your new prospective lender and start the home loan application process.
  8. Get your valuation: Most lenders require a valuation as part of the mortgage application process, including when you’re refinancing, to confirm how much money they can safely lend you. These valuations may be conducted online, based on information about the local area, property size and condition, while sometimes a valuer will come out to physically inspect the property.
  9. Receive your approval or rejection from the lender.
  10. Transfer and settle your loan.

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.

Will I have to pay lenders' mortgage insurance twice if I refinance?

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) to cover the lender against the risk that you may default on your repayments. 

If you refinance to a new home loan, but still don’t have enough deposit and/or equity to provide 20 per cent security, you’ll need to pay for the lender’s LMI a second time. This could potentially add thousands or tens of thousands of dollars in upfront costs to your mortgage, so it’s important to consider whether the financial benefits of refinancing may be worth these costs.

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.

If I don't like my new lender after I refinance, can I go back to my previous lender?

If you wish to return to your previous lender after refinancing, 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 in a number of areas, including fees, flexibility, customer service and interest rate.

Can I refinance if I have other products bundled with my home loan?

If your home loan was part of a package deal that included access to credit cards, transaction accounts or term deposits from the same lender, switching all of these over to a new lender can seem daunting. However, some lenders offer to manage part of this process for you as an incentive to refinance with them – contact your lender to learn more about what they offer.

This article was reviewed by Personal Finance Editor Alex Ritchie before it was published as part of RateCity's Fact Check process.