The ultimate guide on how to refinance a home loan

WeMoney

With record-low home loan interest rates, the days of staying with one bank for the life of your home loan are well and truly over. Today’s borrowers are on the lookout for the best possible deals they can get.

That said, before we show you some of the best ways to refinance your home loan, it is important to define what refinancing is first.

Here’s our refinancing definition: Refinancing or remortgaging is the process of changing the terms for a pre-existing home loan. In effect, refinancing is effectively taking out a new loan to replace the old one, that often at times, is with a new home loan provider and carries a lower interest rate.

There are a number of benefits that come with refinancing a home loan such as being able to get a better home loan product at a lower interest rate, as well as other factors such as being able to restructure your finances, for example debt consolidation.

Let’s get to the following commonly asked questions:

  • When should you refinance your mortgage?
  • What is the best way to refinance a mortgage?
  • Can you refinance your mortgage at any time?
  • How much can you borrow when refinancing your home?
  • How to refinance a home loan?
  • How to assess the cost of your current home loan?
  • How to ask your current lender for a better deal?
  • How to find out how much it will cost to exit your current loan?
  • How to compare home lenders?
  • What should I look for when comparing a mortgage?
  • How do I qualify for a new home loan?
  • How can I exit my old home loan?


Q1. When should you refinance your mortgage?

Home loan markets are in a constant state of change. This is why lenders are frequently adjusting their interest rates, changing their loan products; and modifying their terms and conditions on a near-daily basis.

As a result, what could be a good loan product for you in the short-term may not be over a long-term horizon. It’s for that reason that you should always be comparing your home loan to see if there are better options out there with a better home loan rate.

Similarly, your personal situation is something that changes as well. Your income and employment status frequently change, people have families or get divorced and the way lenders view your situation will adjust along with your needs.

4 main reasons why a borrower may want to refinance

Some of the main reasons a borrower would look to refinance a home loan fall into four main categories.

  1. Seeking lower interest rates.
  2. Looking for a shorter loan term.
  3. Refinancing to diversity investments.
  4. To consolidate debt.

Understanding the reason you are wanting to refinance a home loan is critical because different lenders will be more suited to different reasons. For example, some lenders offer very low rates, while others offer far more flexible products.

While most people think that refinancing is simply about saving money, that’s not always the case. That’s especially true for those looking to cash out or draw equity. In fact, in these cases, interest rates are often the least important factor.

Note: When you take out a new home loan product it’s also possible to get more features such as an offset account or a redraw facility as well as bonuses like a refinance cashback. Some loan products also offer additional benefits such as internet banking, a credit card, savings accounts and debit cards.

Refinancing may not always be the best option

At the same time, there are certain situations when refinancing is not the best option. This commonly is the case when you are looking to cash out some equity to a higher LVR (loan to value ratio) than most banks are comfortable with.

Most lenders are prepared to lend to an 80 LVR, before applying Lenders Mortgage Insurance (LMI). LMI is effectively insurance that protects the lender and is applied on a sliding scale depending on how much risk you represent. Risk is commonly associated with how much of the value of the property you are looking to borrow.

Be aware of additional costs

Similarly, there are also costs involved with refinancing some loan products. Typically, fixed-rate home loan products are locked in for a certain period of time and break/termination fees are applied, should you look to change lenders or products.

In this instance, it is a matter of assessing how much you are going to be saving with a new loan product compared with the costs involved in changing. It’s also important to remember that when taking out a loan, lenders require a property valuation and this is another cost that needs to be met by the borrower.

Note: There are also higher costs involved depending on the type of loan product you are looking at getting. For example, low doc loans are often used for people who run businesses or are self-employed and generally attract higher application fees.

When in doubt, seek financial advice

Before you begin the refinancing or remortgaging process, it is always wise to weigh up your costs compared to what you stand to benefit from refinancing.

Recommendation: Even if the costs are high, if you’re looking at buying another investment property with good long term investment potential, the costs of refinancing might be worth it. Especially when it comes to property investment It’s always worth seeking accredited financial advice.

Q2. What is the best way to refinance a mortgage?

The best way to refinance your mortgage is to start by speaking to a mortgage broker who understands the various lenders and loan products and can match them with your financial goals.

A mortgage broker who knows your personal situation will be able to help you find the right loan product and can keep you informed of changes that could see you benefit by refinancing.

Recommendation: Review your home loan regularly as interest rates and lenders products and policies change constantly. A refinance application is relatively simple if you’ve been through the process before and already have a home loan in place.

Q3. Can you refinance your mortgage at any time?

It’s generally always possible to refinance, the main question you have to consider is what are the costs associated with refinancing your home loan.

The main costs that you are going to run into are any fees that are associated with breaking your current loan (break fees) and then the application fees for a new loan.

If you have a fixed rate home loan, there are normally break fees that are associated with exiting the loan and these can be significant. Similarly, each loan product with come with specific terms and conditions that outline the costs involved in paying out the current loan. This can also include paying a broker clawback fee income cases.

If you’ve got a standard variable home loan and you’ve had that loan product for any significant length of time, it’s likely that the costs to refinance are minimal. Speaking with a mortgage broker is the best way to understand what the costs involved could be and if it is worth refinancing at this time.

Similarly, there can be costs involved in applying for a new loan such as the application fee. Some lenders do cover these costs if you bring a loan to them, so again this is something to discuss with your broker.

Note: The other consideration is your personal situation and employment. A lender is not going to offer you a new loan if you can’t qualify for it based on your income and credit history and credit score. Even though you might have previously been able to take out a home loan, if your personal situation has changed, it might not be possible to get a new loan.

Q4. How much can you borrow when refinancing your home?

When you refinance you are simply taking out a new loan, and the bank or lender will assess you in the same way they assess someone buying a new home. As a general rule, banks are often most comfortable lending up to 80% of the value of a property and this is most often the case when refinancing.

Note: Lenders are normally prepared to lend up to 80% of the property, but in some cases, they might extend this, but it would require that the borrower pays Lenders Mortgage Insurance (LMI), which is an insurance policy that is taken out to protect the lender in the case of property prices falling or a borrower defaulting.

Q5. How to refinance a home loan?

When the time comes to refinance, it is simply a matter of assessing your options, the costs involved and whether these costs fit with your personal and financial goals. Remember, refinancing is simply taking out a new loan, so your job (or your mortgage brokers) is to weigh up the costs and the benefits involved. The best way to refinance a home loan is to speak to a professionally licensed mortgage broker do your own research and check out home loan comparison sites such as:

  • Canstar
  • Compare the Market
  • HashChing

Recommendation: If you do choose to go with a home loan comparison site that offers home loan brokerage services, then, it is always recommended to speak to a licensed financial advisor before you commit to any terms.

Q6. How to assess the cost of your current home loan?

For most people, the question of refinancing all comes down to how much it is costing. The first thing to do is to find out what interest rate you’re paying, which is generally going to be listed on your statement, or you can contact the lender.

If you have a fixed-rate loan, then that is going to be the rate that was agreed upon at the time you took out the loan. It’s also important to note the impact of annual fees as these can at times be significant.

Note: When assessing your overall costs, don’t forget to factor in the impact an offset account has. An offset account effectively reduces your interest payments while acting as an access or transaction account. If you’re looking to change products, it’s important that you are comping like for losing an offset account might have a negative impact.

Q7. How to ask your current lender for a better deal?

While we are focused on refinancing, which is taking out a new loan to replace the old one, most lenders will be very keen to keep you as a customer. They might even be willing to offer you a reduced rate on your current home or even apply a sharply discounted introductory rate for a period of time. The only way to know is to ask.

Similarly, many lenders can easily adjust your loan products without the need to apply for a new loan at all and this could be a quick way to save money on interest payments or even to get a new superior loan product, without the hassles of going through the application process.

Q8. How to find out how much it will cost to exit your current loan?

One of the most important questions that you’ll have to find out is how much it’s going to cost to exit or terminate your current home loan. Almost every lender will charge a termination fee of some kind, however, it will most likely be very small.

It’s also worth noting that if you do in fact, take out a new home loan and if you’ve already paid Lenders Mortgage Insurance (LMI), you will be required to pay it again with a new lender.

Recommendation: For those borrowers with a fixed rate home loan, however, the termination fee is likely going to be quite a bit higher. The best thing to do in this situation is to ask the lender and they can let you know what you're up for. They might even be in a position to offer you an improved interest rate just by bringing up the idea of terminating your home loan with them.

Q9. How to compare home lenders?

There are a number of good reasons that you should be looking to refinance, including finding a better rate, cashing out some equity, improving the terms of the loan or getting improved loan features, or to consolidate debt. It’s certainly possible to achieve many of these at once.

Once you understand the costs involved in changing loans, you can now assess your options. Your best option is to work with a broker to assess your options and match you with the right loan. It’s also worth noting that most lenders have very low introductory home loan rates, but these rates adjust after a set period of time.

Note: The other factor that you’ll need to consider is also whether or not you’ll be able to qualify for the new home loan. For example, many of the lowest rate loans are only targeted at PAYG employers on permanent staff as these people represent the lowest risk to a lender.

Q10. What should I look for when comparing a mortgage?

There are not only costs to terminate your old loan, but also costs involved in taking out a new loan. The most common costs are going to be the application fee, settlement fee and the costs of a bank valuation on the property.

Note: If you’re looking to refinance under that 80% LVR level, then you won’t be required to pay Lenders Mortgage Insurance (LMI).

Q11. How do I qualify for a new home loan?

At this stage, you are simply going through the home loan application process and getting all of your documentation together. This involves obtaining the required financial information, property information and also your personal details. The broker or lender will assess your creditworthiness and suitability to take out a loan based on the provided information.

Q12. How can I exit my old home loan?

At this stage, your new lender will handle most of the details for you and will work with your old lender.  The new lender will help discharge your old loan and exchange the required documentation. At settlement, the new lender will release the funds to pay out the old loan and set up new accounts for your home loan and any associated loan products such as offset accounts.

Recommendation: Even though you’re all done, it is important that you continually review your home loan to see if there are changes or new products that could benefit you. A quick 15-minute loan check-up has the potential to save you tens of thousands of dollars over the lifetime of the loan.

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Disclaimer: The author is not a financial advisor and the information provided is general in nature and was prepared for information purposes only. This article should not be considered to constitute financial advice. Accordingly, reliance should not be placed on this article as the basis for making an investment, financial or other decision. This information does not take into account your investment objectives, particular needs or financial situation.

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