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Home / Refinance / Ultimate Guide to Refinancing a Home Loan in New South Wales

Ultimate Guide to Refinancing a Home Loan in New South Wales

Homebuyers consulting a trusted Sydney mortgage broker about refinancing.

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.

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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?

Pros of refinancing your home loan

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.

Better interest rate

Many Australians refinance their home loans to get lower interest rates. Generally, lenders offer lower rates to new customers. Moreover, you're likely in a better financial situation to negotiate a lower interest rate than when you first took out the loan.

Reduced ongoing fees

If you have a costly annual fee or other ongoing fees you'd like to be rid of, you might consider renegotiating your home loan with your current lender or a new lender.

Cashback offers

Some lenders might offer a cashback deal when you refinance, providing short term cash flow relief.

Fixed-rate loan expiring

Most lenders only off a fixed-rate home loan for an introductory period before it reverts to a standard variable rate loan. The same is true for an interest-only home loan reverting to principal and interest repayments. If you wish to keep interest-only or fixed-rate loan perks, you may want to refinance.

Change monthly repayments

Your financial circumstances may have changed since you took out the existing home loan. You may want to increase or reduce your monthly repayments to save money in the long term or adjust them to your current lifestyle.

Change home loan term

Similarly, if you have more cash to spare, paying off your home loan more quickly will save you more money. Alternatively, if you're paying more than you can comfortably afford, lengthening the loan term should ease the financial burden.

Better loan features

Offset accounts, redraw facilities, split loans, or extra repayments might enable you to save more money on your home loan.

Access home loan equity

Home equity is the amount of the property value you own. By refinancing, you could free up equity to pay for other things, such as a new car or a holiday.

Borrow more for other expenses

Some might refinance their home loans to consolidate other debts or borrow more for other expenses, such as renovations.

Cons 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.

Higher interest rate

While the goal is to reduce your interest repayments, you may end up paying more if you're not careful. Be wary of lower introductory rates - they may revert to a much higher rate over time.

High break fee

Depending on your current lender, loan balance, and remaining loan term, you could find yourself paying thousands of dollars in break costs when switching home loans.

Higher overall fees

An annual fee, valuation fee, mortgage registration fee, and exit fees may make your home loan refinancing more expensive. Plus, extra features, such as an offset account or redraw facility, might come with added costs.

Paying LMI again

If you refinance your home loan before owning 20% property equity, you might have to pay Lenders Mortgage Insurance again. Lenders Mortgage Insurance is a costly extra required of risky borrowers.

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 a Sydney mortgage broker about your options. Mortgage brokers are industry experts and 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.

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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.

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