Being in the mortgage industry, I know homeowners are constantly advised to do a home loan health check. This is best practice, especially if you are coming out of your fixed rate period, struggling to meet repayments, or going through some life changes, especially events affecting your finances.

Most of the time, the practical step after a home loan health check is refinancing. If not refinancing, there are other home loan solutions, and this depends on the unique circumstances that the homeowner is in.

When it comes to refinancing, what is being left out of the discussion is that some scenarios need some attention. Many home loan borrowers struggle to refinance. Why? Keep reading to learn more.

Reason #1: Serviceability Issue

When obtaining a home loan, the loan amount a bank or lender grants hinges on various factors. Alongside your loan-to-value ratio (LVR) and credit score, you’ll likely come across the term “serviceability.” It is the bank’s way of evaluating your capacity to manage a home loan successfully. This involves scrutinising your income and expenditures and other considerations to ascertain the feasible amount you could comfortably allocate for repayments.

Now, there’s another term involved, and it’s called “serviceability buffers”. They are an additional precautionary measure banks use when assessing your ability to repay your mortgage. These buffers are designed to provide a safety margin that accounts for potential future interest rate increases or changes in your financial circumstances. Simply put, they act as a cushion to ensure you can still afford your mortgage repayments even if interest rates increase or unexpected financial challenges arise.

Serviceability buffers used by banks, being at a higher rate now than 3 or 5 years ago, are a major serviceability issue at the moment. There are calls for banks to slash their serviceability buffers, and in fact, CBA and Westpac, two of the Big Fours, were quick to adhere as of June this year.

Reason #2: Valuation Issues

Remember, the value of your property can go up and down. It can change over time because of property market trends in your location, economic conditions, interest rates, home features added or altered, government policies in your state, infrastructure and development near you, and many more. These shifts play a role when you’re considering refinancing your mortgage. Why?

This is because when you refinance, the bank will check if your property’s value is sufficient to rationalise the “new home loan”. They want to make sure that your home can function as a security or collateral in case you defer on your home loan repayments.

If your property’s value has diminished and you still owe a lot in your current mortgage, then you can be denied to refinance.

Reason #3: Soaring Interest Rates

Interest rates play a pivotal role in refinancing, and their trajectory is influenced by the cash rate set by the RBA. As the cash rate undergoes successive hikes, interest rates tend to follow suit, resulting in an upward trend that can significantly impact borrowing costs. This presents a challenge for those considering mortgage refinancing.

The pressure of rising interest rates along with higher living costs have made home loan repayments even more challenging to meet, and so, homeowners are unable to gain enough equity in their homes. This adds to the challenge of refinancing, and normally if they are allowed to, and they are borrowing more than 80% of their home’s value, Lenders Mortgage Insurance (LMI) will be required, which will burden the borrower even more.

Don’t get stuck in Mortgage Prison

In light of the three challenges that I’ve mentioned, homeowners must navigate mortgage refinancing with prudence and strategic insight:

• Leverage Broker Expertise: Collaborate with mortgage brokers with unparalleled access to lenders and rates. Their in-depth knowledge of the property market can steer homeowners toward viable refinancing pathways.
• Monitor Market Trends: Vigilantly track property trends. Rising property values might create an opportunity to wait until LVRs fall below the critical threshold.
• Financial Vigilance: Conduct a comprehensive financial assessment. Responsible budgeting, minimising non-essential expenditures, and optimising costs can alleviate the financial strain while exploring refinancing options. It’s important to be aware of your credit score and actively work towards improving it. This can be included in your overall financial monitoring.
• Embrace Resilience: Despite challenges, homeowners must remain resilient. Don’t lose hope. Property experts are saying that we are almost at the end of the tunnel – the cash rate hikes are expected to end soon, and we’ll finally see rates stabilise. Also, you do not have to thread through this challenging period by yourself. Mortgage brokers can help you find a solution if you are struggling to refinance – they know the market very well, and they are there to work in your best interest.

I encourage you to take the first step towards knowing more about how to better your financial scenario and avoid being trapped in mortgage prison. Explore how Lendstreet can help you chart your financial course, especially if you’re coming out of your fixed-rate term.

You can also book a one-on-one consultation with me through this link.

Refinancing a home loan can be a strategic move for homeowners, offering opportunities to secure lower rates, decrease repayments, or tap into home equity. However, it has its intricacies – costs, timing, and individual factors all play an important role. This article will delve into these essential aspects, providing practical insights for those considering this financial step.

Embarking on the journey of home loan refinancing requires careful consideration and strategic planning. It is crucial to understand various factors that influence this decision. Let us explore key aspects homeowners should consider when deciding to refinance their home loan – from assessing their financial situation to understanding the right timing and weighing the potential costs and benefits.

Assessing Your Financial Situation

The refinancing journey begins with an in-depth assessment of your financial situation. This step is critical as it forms the foundation for refinancing decisions and potential lenders’ evaluations.

1. Credit Score: Your credit rating significantly influences the conditions of your forthcoming loan. A high credit score can unlock favourable interest rates and better loan conditions. Consistently reviewing your credit report enables you to comprehend your credit position and undertake measures to enhance your rating if required.
2. Income Stability: Lenders look for borrowers who can demonstrate a reliable and consistent source of income, as it assures that they can comfortably manage loan repayments. Stable income history is a positive indicator of your financial reliability and can significantly improve your chances of a successful refinancing outcome.
3. Debt-to-Income Ratio: This proportion compares your monthly financial obligations to your total monthly earnings and is another aspect that banks and lenders closely examine. A high debt-to-income ratio may signal potential repayment difficulties, posing challenges to your refinancing ambitions. It’s advisable to reduce existing debts where possible before applying for refinancing.
4. Savings and Assets: Besides your income, lenders also consider your savings and assets. These resources can serve as a safety net, strengthening your financial profile and increasing your attractiveness as a borrower.

Is Now the Right Time to Refinance?

The decision to refinance your home loan requires a comprehensive examination of several factors, including interest rates, market conditions, and personal circumstances.

The current economic climate can significantly influence your refinancing choice. Typically, interest rate hikes entice people to refinance to seek better rates to lower repayment costs. If your current mortgage rate is above the market average, now could be a favourable moment to contemplate refinancing. Additionally, your specific circumstances play a vital role in determining the suitability of refinancing. Major life events or changes in your plans can impact this decision. For example, if you intend to start a family or are contemplating a career shift, it is crucial to consider these factors when making your decision.

The timing of your refinancing decision is key. Many homeowners consider refinancing this year as a good move rather than experiencing mortgage stress and suffering the consequences of being unable to pay off their mortgages.

The kind of refinancing you’re considering also matters. For example, cash-out refinancing can be expensive despite high rates, and those considering this option might want to wait until rates decrease.

Weighing the Costs and Benefits

The decision to refinance can bring potential benefits but also carries certain costs. Before proceeding, it’s crucial to weigh these aspects carefully to ensure that refinancing is the most beneficial move for you.

Potential Benefits:

• Reduced Interest Rate: Among the main motivations for homeowners to consider refinancing is to obtain a lower interest rate on their mortgage. This can result in substantial savings over the loan’s duration.
• Tapping into Home Equity: Refinancing also offers an avenue to access the equity present in your home. This can be utilised for significant expenditures like home improvements, educational expenses, or even investments in other properties.
• Consolidating Debt: If you have several debts with high-interest rates, refinancing presents an opportunity to combine them into one manageable loan with a potentially lower interest rate.

Associated Costs:

• Application Fee: The application fee is a one-off fee associated with loan applications and is imposed by lenders. These fees are intended to cover administrative costs linked to processing refinancing applications and may differ in amount per lender.
• Discharge Fee: If you are refinancing your home loan with a different bank, your current lender may charge you the administration costs of ending your loan contract sooner than the set termination date.
• Break fees: Refinancing before your fixed rate period means your contract with the bank will be subject to break fees. Remember, the bank factored in the current fixed rate in your home loan. Any changes may mean profit loss for them; hence, there is a fee to cover these changes.
• Valuation Expenses: As part of the refinancing, conducting a property appraisal is essential to determine your home’s current market value. The average valuation cost is $200 but can fall anywhere from free to around $800.
• Land Registration Fees: Land registration fees are charges the government imposes for registering changes in property ownership or interests. They vary by location and transaction type. Check with your local land registry or legal professional for accurate and up-to-date information.
• Lenders Mortgage Insurance (LMI): This is required when borrowers have a deposit of less than 20%. It is the lender’s safety net if the borrower can’t pay the loan. The payable amount needed for LMI depends on the loan size and borrower deposit amount. Options can be paying it upfront or adding it to the loan amount, making cost management easier. Borrowers should consider the added cost before opting for LMI.
• Government Fees: When refinancing a home loan, borrowers should consider specific government-related fees. These may include the mortgage registration fee, stamp duty, and land title search fee. It’s essential to be aware of these costs, and borrowers can inquire with their lender or the relevant government authority for precise details. Planning for these fees will help ensure a smoother refinancing process and informed decision-making.

To determine if refinancing is beneficial, compute your break-even point – the duration for the monthly savings from a lower interest rate to exceed the upfront refinancing costs. Refinancing could be a strategic move if you intend to reside in your home past this point.

When Refinancing May Not Be the Best Option

Certain situations and potential risks may make refinancing less attractive.

Situations to Avoid Refinancing

1. Imminent Relocation: Refinancing may offer little benefit if you plan to move soon. The costs involved in refinancing outweigh the short-term benefits if you’re staying in your home longer to recoup those expenses.
2. Nearing the End of Loan Term: Refinancing might not be the best choice if you’re close to completing your mortgage term. You’ve likely already paid off a large part of the interest and are paying more toward the principal. Refinancing could reset this process, leading to more interest payments.
3. High Closing Costs: Refinancing usually involves various fees and closing costs. If these costs exceed the potential savings from a lower interest rate, there might be better moves than refinancing.
4. Stable Interest Rates: If interest rates are stable, the benefits of refinancing may diminish. It’s crucial to compare your current interest rate with the prevailing market rates before deciding.

Risks of Refinancing

1. Prepayment Penalties: Some mortgages include penalties for paying off the loan early. If your existing loan includes such penalties, it could offset the savings you’d gain from refinancing.
2. Lengthened Payment Duration: Refinancing may decrease your monthly installments, but it frequently implies prolonging your loan’s term. This could lead to an increase in the overall interest you pay throughout the loan’s duration.
3. Risk of Recurring Debt: If refinancing is to consolidate liabilities or tap into home equity, it’s crucial to establish a robust strategy to avoid getting trapped in repeated debt cycles. Without careful financial management, you might accumulate more debt after refinancing.
4. Loss of Equity: Refinancing to tap into your home equity can help finance significant expenses, but it also reduces the amount of equity you have in your home. This could leave you with less wealth over the long term.
5. Market Fluctuations: Future changes in the housing market could affect the benefits of refinancing. If property values decrease, you owe more on your mortgage than your home is worth.

Advise and Reminders

Remember these essential pointers and steps to consider as you assess your choices.

Fees and Considerations

• Be Mindful of Costs: Refinancing involves various charges, such as application fees, appraisal fees, and closing costs. Including these costs when determining the possible savings from refinancing is crucial. Some lending institutions offer ‘zero-cost’ refinancing, where they pledge to shoulder these expenses, but they might impose a higher interest rate or incorporate the costs into your loan balance.
• Study the Terms and Conditions Carefully: Each loan carries its unique set of rules and stipulations. Before committing to a new mortgage, ensure you fully grasp all the conditions, encompassing the interest rate, repayment plan, and any charges for early settlement.
• Evaluate Loan Features: Beyond the interest rate, consider the features different loans offer. For example, some loans may offer flexible payment options or allow extra repayments without penalty.
• Ponder Over Extended Impact: Refinancing may reduce your monthly installments but can also stretch your repayment term. Think about the long-haul financial implications of this extension.
• Ready for Evaluation: As part of the refinancing procedure, your home will be subject to an appraisal. Ensure your property is in top shape to achieve the highest possible valuation.

Maximise Your Home Loan Potential with Lendstreet

At Lendstreet, our seasoned mortgage brokers are here to support you throughout the refinancing process. We offer customised advice, help you understand loan conditions, estimate potential savings, and align refinancing with your long-term objectives.

Take advantage of our free home loan health check to review your current loan’s suitability, especially after the fixed-rate period. Visit our refinancing page for more details on the benefits and process. When ready, book a discovery call for a personalised consultation to tailor your financial journey.

Partner with Lendstreet to confidently navigate your finances and achieve your goals. We’re just one click away!

If your home loan repayments are becoming unmanageable, refinancing your home loan can relieve financial stress and allow you to renegotiate the terms of your mortgage to better suit your needs and goals.

Of course, the decision to refinance should be carefully considered depending on current interest rates, your personal financial situation, and whether you want to pay off your home loan quicker.

As of 2023, Australian home loan rates are continuing to rise. If you have a variable home loan or you’re soon exiting your fixed-rate mortgage, the strain of paying rising interest rates can lead to a significant financial burden.

Here are five reasons why you should consider refinancing your home loan in 2023.

1. Lower Interest Rates

If you took out your home loan when the average interest rate was exceptionally high, you can choose to refinance with a new or existing lender to reduce your monthly home loan repayments. This can make your existing debt more manageable and help you save money in the long term.

The big four banks of Australia predict that the national interest rate will begin to drop at the end of 2023, so choosing to refinance your home loan in 2023 is an excellent way to cut the amount you owe to lenders.

For some, switching to a lower-interest-rate home loan is a worthwhile strategy. You’ll not only be able to reduce the amount you owe on your loan, but you won’t need to increase your budget – helping you to pay off your home loan faster.

2. More Manageable monthly repayments

Many more Australians face mortgage stress in 2023, with cash rate hikes since May 2022. Mortgage repayments are already causing major financial strain for many, with 880,000 Australians facing an end to their fixed-rate home loans this year. Mortgage interest rate for a three-year fixed-rate home loan currently ranges from 5.25% to 5.99%, which could dramatically increase the cost of monthly loan repayments.

If you choose to refinance your home loan, you’ll likely be able to reduce your mortgage repayments to make them more manageable going into 2023 and 2024. Home loan refinancing is designed to give you a better interest rate on your new loan, effectively helping you to save money while still making regular payments.

Home loan refinancing won’t be enough for some, and the rising interest rate will continue to cause significant strain. If this is the case, ask your mortgage broker if switching to making interest-only payments will be better for your scenario or if they can ask your current lender to look to extend the length of your home loan.

3. Reduced Loan Term

When you refinance your home loan, you can choose to shorten the term to pay off your loan sooner. For instance, if you’re three years into a 30-year home loan with your current lender, you can switch to a 15-year term with your new loan. While your monthly repayments will be considerably higher, you’ll face less debt in the future.

4. Access Home Equity

If you’re a homeowner with significant equity in your property, choosing to refinance your home loan can help you to access tax-free cash built up in your home. By taking out a new loan, known as a cash-out refinance loan, you’ll have funds that can be used for home renovations, debt consolidation, or as retirement funds.

Accessing home equity is only an option for certain homeowners with significant equity already built up in their property. They will likely be far through their existing home loan. If you’re early into your home loan with your current lender, you won’t be eligible for a cash-out refinance loan.

5. Change your home loan type

For Australians on an adjustable-rate mortgage, interest hikes can lead to unmanageable monthly repayments, causing unpredictability and increased mortgage stress.

By refinancing your home loan and switching from a variable home loan to a fixed-rate loan, you’ll face more stability and predictability when making your monthly mortgage repayments, allowing you to budget better and save your disposable income.

Choose a better home loan with Lendstreet

At Lendstreet, we understand the importance of finding the right home loan for your individual needs. That’s why we offer our clients a range of loans, whether you’re a first-time buyer or looking for a new investment property.

We understand the Australian home loan market like no other. If you’re interested in refinancing your home loan, book a discovery call with one of our experts, who will give you up-to-date guidance and advice to help you make well-informed decisions. Book here.

FAQs

What is a fixed-mortgage rate?

In a fixed-rate mortgage, homeowners face the same interest rate for the entire loan term duration. This means that the borrower’s monthly mortgage payments remain the same throughout the life of the loan, regardless of any changes in the broader interest rate.

Do I still need to pay LMI when refinancing?

When refinancing a home loan in Australia, whether or not you’ll need to pay LMI (Lenders Mortgage Insurance) depends on various factors. LMI is typically required when the loan-to-value ratio (LVR) exceeds 80%. It is an insurance that protects the lender in case the borrower defaults on the loan.

If you initially obtained a loan with an LVR over 80% and paid LMI, refinancing alone does not automatically remove the LMI requirement. When refinancing, the new lender will consider the LVR based on the property’s current value and the new loan amount. If the LVR remains above 80%, the new lender may require LMI.

However, if your property has significantly appreciated in value since you obtained the original loan, the LVR may drop below 80% upon refinancing. In such a scenario, you may be able to avoid paying LMI with the new lender.

It’s essential to note that lender policies and guidelines may vary, so it’s advisable to consult with potential lenders or an experienced mortgage professional to understand their specific requirements regarding LMI during the refinancing process.

Can you refinance with your existing lender?

Yes, it’s possible to refinance home loans with an existing lender. In fact, many borrowers choose to do so because they may already have an established relationship with their current provider and may be able to negotiate a better mortgage interest rate. If your current loan is unmanageable, contact your existing provider.

Do I need to pay exit fees if I pay off my mortgage sooner?

Thanks to the National Consumer Credit Protection Act (NCCP), lenders can no longer charge exit fees on home loans taken out after 1 July 2011. However, home loans taken out before this date may face early repayment fees (exit fees) or a “deferred establishment fee”. This will be charged if you pay off your home loan earlier than the agreed terms.

What is a discharge fee?

A discharge fee, also known as a mortgage discharge fee or settlement fee, is a fee charged by a lender when you fully repay or “discharge” your mortgage loan. It is typically applicable when you sell your property, refinance your mortgage with a different lender, or pay off your loan in full before the scheduled end of the loan term.

The discharge fee covers administrative and processing costs incurred by the lender when closing out your mortgage. These costs may include tasks such as finalising the paperwork, removing the lender’s interest in the property title, and updating relevant records.

The specific amount of the discharge fee can vary depending on the lender and the terms of your loan agreement. It is typically a fixed amount, although it can also be calculated as a percentage of the loan balance or property value. The fee is usually disclosed in your loan documentation, and you can inquire about it with your lender when planning to discharge your mortgage.

It’s important to note that discharge fees are separate from any early repayment fees or break costs that may apply if you pay off your mortgage early, which are related to the loss of interest the lender would have earned over the original loan term.

Are you stuck paying high-interest rates and ongoing fees with your current home loan? If your mortgage feels like it’s holding you back, consider refinancing your home loan. Refinancing commitments reached an all-time high last year, with a rise of $17.2 billion in July 2021.

Just because you signed the dotted line on your current home doesn’t mean you must stick with the same terms forever. If you think you can find a better deal out there, consider refinancing.

What does home loan refinancing mean?

Refinancing means taking out a new mortgage to repay an existing one. Borrowers can refinance with their current lender or a new lender.

There are a multitude of different reasons Australians might consider refinancing. You may have experienced a recent change in your personal or financial situation. Or, you might want a better deal than you could get when first applying.

While you can refinance any loan type, including a car loan or personal loan, mortgages are the most popular refinancing options.

Many refinancers change home loan lenders. However, it’s also possible to stick with the same lender. If you think you might want to refinance your home loan, follow our guide for answers to all your questions.

How does refinancing a home loan work?

Essentially, refinancing your home loan means applying for a new loan to pay off your old one. Your new home loan should have better terms and leave you in a better place financially. The process could be as simple as comparing your options and applying for your chosen loan.

However, not all situations are so straightforward. There are several factors you should consider before making the jump. For example, do you have early repayment fees on your current home loan? If so, you might find that refinancing your home loan costs you more money than it saves.

To begin refinancing your home loan, you need to thoroughly understand your personal and financial circumstances. What do you want from your home loan refinance?

Further on, we’ll explain the pros and cons of refinancing your home loan so you can make the best decision for your home loan situation.

How much money could you save by refinancing your home loan?

Of course, the main goal of refinancing your home loan is to save money. But how much extra cash can you realistically save with a better deal? Remember not to set your sights too high. Realistically, most borrowers can only shave off a small amount or add one or two features to their home loan. However, on a 30-year mortgage, every little bit can make a difference.

How much money you save depends on your loan amount, the remaining loan term, and the interest rates you’re switching between. You should also consider how other costs will affect you switching home loans. Let’s look at an example.

Owen has $400,000 remaining of your home loan and another 20 years of a 30 year home loan, with an interest rate of 4.2%. If he stays with this existing home loan, his monthly repayments would be $1,956. Over the remaining loan term, Owen would pay another $152,207 in interest repayments.

However, if Owen were switching loans to an interest rate of 3.6%, his monthly repayments would drop to $1,819. In the next 20 years, Owen would pay $125,650 in interest repayments. In total, he’s saved $26,557. Just think what else he could put that sum towards!

Of course, your savings depend on your circumstances and loan terms.

Understanding your current financial situation

When refinancing your home loan, it’s easy to get swept up in the promise of incredible savings. However, you must remain realistic. While you might save as much as Owen, it’s also possible your savings are slighter.

As a result, before entering the refinancing process, you should take stock of your current financial situation. The best way to refinance your home loan and save money is to set yourself a goal. Make sure it’s not open-ended – for example, “I want to save as much money as possible.” Instead, work out a figure of an exact amount you would like to save. Use our calculator for refinancing.

The easiest way to do this is to look at what you could change on your home loan to save money. For example, “I want to reduce my interest rate by 0.5%”, or “I would like to add an offset account.” With definitive goals, you’re more likely to achieve results. Simply stating you wish to save money could get you nowhere – after all, where do you begin?

So, why refinance? If it’s such a popular move, there must be a reason to switch home loans. Let’s look at the pros of refinancing your home loan.

Why might refinancing your home loan not be in your best interests? Just because a more attractive deal might be available doesn’t mean it’s the best answer for your circumstances.

What should you consider when refinancing a home loan?

When you refinance your home loan, you should consider all possible scenarios and factors. Remember, if you’re not careful, you might find yourself with a worse home loan deal than your current mortgage. Here are some points to consider:

1. Understand if there are any early exit fees or break costs involved
2. Work out how much you could potentially save over the entire loan term
3. Research other home loans available
4. Determine what you want from your home loan refinancing
5. Understand what your new monthly mortgage repayments will look like
6. Understand additional costs
7. Decide if your new loan should be a fixed-rate mortgage, variable, or split home loan

Upfront and ongoing costs of refinancing

As we mentioned, refinancing your home loan might result in fewer cost savings than you would like.

Upfront costs

1. Exit fees: Check your loan contract to see if you’re liable to pay early termination fees when refinancing home loans.
2. Break fees: Also known as mortgage deregistration fees, break costs depend on your remaining loan amount and can reach thousands of dollars.
3. New home loan application fees: Mortgage registration fees or other admin costs.
4. Lender’s Mortgage Insurance: If you don’t own 20% equity on your property, you may have to pay LMI with your new lender.
5. Stamp duty: You may be liable to pay stamp duty. Use our stamp duty calculator to work out how much you’ll pay.
6. Settlement fees
7. Property valuation fee: Your new lender might need to assess the property’s value before lending you the total loan amount.

Ongoing costs

1. Monthly repayments: Are your new mortgage repayments higher or lower than they were?
2. Direct debits: When switching lenders, make sure you move your repayment direct debits to the new lender to avoid any late or missed payment penalties.
3. Annual fees: Many lenders charge annual admin fees.

Does refinancing hurt your credit score?

Technically yes, refinancing might impact your credit score. The same is true of every loan you take, including personal and car loans. Your credit score would have dipped when you applied for your existing loan.

However, refinancing a few times throughout your loan’s lifetime shouldn’t significantly affect your overall score. On the other hand, if you’re refinancing your home loan several times a year, you might see your score take a hit.

When you apply for a home loan, whether it’s your first loan or refinancing, the lender will check your credit report – known as a hard enquiry and is recorded on your report.

When a new lender looks at your report, they’ll see other hard enquiries suggesting you’re trying to take on new debt. If there are a lot of further enquiries, it might imply something negative about your financial health.

As a result, it’s best to only apply for new home loans that you’re positive you want. Additionally, only apply to loans you’re sure you’ll get approved and meet the lending criteria.

Is there any reason why you wouldn’t refinance?

Just because so many other Australians are refinancing, it doesn’t mean it’s the best choice for you. Remember, if you’re happy with your current lender and home loan, then refinancing isn’t necessary. Here are some reasons you might not want to refinance.

1. If you’re in the middle of a fixed interest rate loan, you might have to pay break fees when leaving. Paying off or refinancing your fixed-rate home loan before the fixed period ends might result in high costs. If you’re in this situation, weigh up the benefits of refinancing your home loan against the charges.
2. If your loan to value ratio is above 80%, your new lender might require you to pay LMI again. When applying for a home loan with less than a 20% deposit, lenders require LMI. Refinancing might result in another LMI payment if you still have less than 20%.

How to refinance a home loan

Firstly, you need to decide what you want from your refinancing. Do you wish to move to a different financial institution? Do you want to reduce monthly home loan repayments? Or do you want to add additional features to your home loan account?

As we mentioned, setting tangible, realistic goals is the best way to see results. It’ll also help avoid disappointment. You must consider all your options and speak to an expert before deciding.

Choosing your refinancing home loan

There are so many home loan options available from different lenders. Consider all the potential features you could negotiate. However, remember that some features might come with additional costs – for example, do you need a redraw facility? Check the comparison rate to understand the actual cost of the loan.

1. Do you want to pay principal and interest repayments? Or do you want interest-only loans?
2. Do you want a split loan? This is where part of the home loan has a fixed interest rate while the other is variable.
3. Do you want an entire fixed-rate loan? This allows for stability and predictable budgeting.
4. Do you want an entire variable rate loan? You might get lower interest rates with a variable rate home loan.
5. Do you want a redraw facility? You can access extra repayments on your home loan if you run into any cash flow problems.
6. Do you want an offset account? You can reduce the total interest payable by keeping your savings in a transaction account linked to your mortgage, known as an offset account.

How much can you borrow?

Generally speaking, most lenders only lend up to 80% of the property price. This is known as the loan to value ratio (LVR). To calculate your LVR, divide the loan amount by the purchase price. When refinancing, divide the new loan amount by the current property value. The new loan amount depends on how much equity you have.

If your property is worth $1,000,000 and you have already paid $200,000 of your home loan, you’ll only need to borrow 80% LVR when refinancing.

Another consideration is your borrowing power. The LVR contributes to your borrowing power – however, lenders also consider your credit score. To improve your borrowing power, make on-time repayments on your existing home loan and ensure you maintain a good credit score.

What details will I need to supply?

As with any application for credit accounts, you’ll need to supply various documents to your new lender. These might include

1. Personal details include your name, age, address, contact details, and proof of identity.
2. Family situation – including your relationship status and the number of dependents.
3. Employer and earnings – to establish your long-term income and ability to continue repaying the loan. You’ll need tax returns and payslips to confirm.
4. Expenses – you’ll need bank statements and bills to prove your current expenses.
5. Assets – other assets show your ability to accumulate wealth over time, improving your borrowing power. Assets could include additional property, investments, or cars.
6. Liabilities – any other debts you owe, such as personal loans or credit cards, might impact your borrowing power.
7. Information about your current home loan and the property offered as security.

What’s needed to refinance a home?

You’ll need at least 5% equity on your current home. However, it’s generally best to save at least 20% to avoid LMI payments with your new home loan. You cannot transfer LMI from your old lender to a new one. Therefore, it’s best to reduce the LVR as much as possible before refinancing. Here are the steps to refinance your home loan.

1. Research

We’ve mentioned several traps you could fall into when refinancing – paying LMI again or resulting in higher interest rates. Ensure you do your research to avoid ending up with a worse deal than you started with.

Find out the details of your current home loan and determine what changes might enable you to meet your financial goals. Shop around for different interest and comparison rates. Make sure your new lender has an Australian Credit Licence.

2. Compare

Just because a home loan deal might look attractive on the surface doesn’t mean it’s the best choice for you. Compare different loans based on interest rates, ongoing fees, and other features. For example, an interest-only home loan might save money on your mortgage in the short term, but will it cost you more overall when you have to repay the principal down the line?

3. Speak to an expert

To ensure you get the best possible home loan deal, speak to Sydney’s home loan experts about your options. These industry experts will help you find the best possible home loan solution for your financial goals. Additionally, brokers are free for borrowers to use – so you don’t need to worry about added expenses.

4. Property valuation

Get another valuation of your property – especially if you’ve completed renovations or owned the property for more than a year. The Sydney housing market is currently experiencing impressive growth. It’s likely your property worth has increased, and you might be able to borrow more from the lender.

5. Apply

Complete the application, including undergoing a credit check, with your new financial institution. If you’re unsure about the process, a mortgage broker can help you complete your application.

6. Legal documents

Supply the necessary legal documents to your lender, making sure you meet their eligibility criteria. Seek legal or financial advice at this stage to ensure the home loan refinancing process goes smoothly.

7. Approval

The lender will respond once you have submitted your home loan refinancing application. Usually, you’ll get conditional approval or denial. If denied, speak to a mortgage broker about how you might improve your chances. Conditional approval does not mean that you’re 100% guaranteed to get the home loan refinance.

The lender will complete a more thorough check before offering unconditional approval. At this stage, you can trust that you’ll receive the funds.

8. Settlement

When you refinance your home loan, your lender will receive the property title deeds from your old lender and pay the remaining loan amounts. You may need legal or financial advice to help with this step.

Should you stick with your current lender or find a new lender?

Refinancing your home loan depends entirely on your situation. If you’re unsatisfied with your current loan terms, speak to a mortgage broker about your options. However, it’s worth remembering that there might not be a better deal out there. To get the most out of refinancing, make sure you improve your borrowing power and credit score.

Additionally, ensure that refinancing is the best decision for your current circumstances.

When can you refinance a home loan?

Generally speaking, you can refinance your home loan at any time. As long as you have 20% equity and are not in the middle of a fixed rate home loan period, you can refinance to find a better deal. Make sure you check the costs of refinancing your home loan – home loans with exit fees and break costs might be more expensive to refinance.

Finally, consider your credit score. If you have recently refinanced, consider whether it is a good idea to refinance again so soon.

To Sum Up

Refinancing a home loan can save you thousands of dollars. You’re probably in a better financial position now than when you first took out the loan. Accordingly, you may be able to negotiate better loan terms with your existing lender or a new one. Make sure you research all your options so you don’t fall into any traps and pay more than you should.

Speak to a mortgage broker to get the best deal available for your situation.

FAQs

When should you decide to refinance your mortgage?

If your current mortgage costs you more than you should, consider refinancing. Even an interest rate saving of 0.5% can save a lot of money in the long term. Make sure you set tangible and realistic goals for refinancing and speak to a broker to get the best outcome.

Is refinancing a good idea for a home loan?

Many Australians find they’re making far higher home loan repayments than they should. Suppose your financial situation has changed since you first took out your mortgage. In that case, you might consider refinancing to get a lower interest rate, reduce ongoing fees, or negotiate additional loan features.

Is refinancing cheaper than getting a mortgage?

Refinancing costs include mortgage application fees, legal expenses, and early exit costs. Check your current loan terms to determine whether refinancing could cost you more than sticking with your home loan.

Can I refinance my home loan and get cash?

Some lenders offer cashback when you refinance. For example, if you take out a new loan to repay the old one, the lender will pay you cash for the equity you own on the property.

Do I need a deposit to refinance my home loan?

More often than not, you don’t need a deposit to refinance. Generally speaking, you should have 20% equity on the property. However, if you have less than 20%, you might want to offer a deposit to avoid paying Lenders Mortgage Insurance on the home loan.

How long does it take to refinance a home loan?

Most home loan refinancers take between 30 to 45 days to complete. However, it may take longer depending on your situation. Before refinancing, make sure you research your options and prepare your financial documents to ensure the refinancing process goes smoothly.