Most Australians consider refinancing a home loan to save money with a lower interest rate and beneficial loan features. However, when you refinance a home loan, you might be paying additional costs you hadn’t considered. We’ll review the costs involved with home loan refinancing to ensure you make the best financial decision.
What does it mean to refinance a home loan?
Refinancing means using a new loan to pay off your existing lender. Homeowners refinance their home loans to reduce interest rates, switch to a fixed-rate loan, or eliminate ongoing fees.
If you struggle to meet your home loan repayments, you might consider negotiating a better deal with the same lender – internal refinancing. However, if your current lender refuses to offer a better deal, you might approach an external financial institution to get a home loan that suits your financial situation.
How Much Can I Borrow to Refinance My Home?
Like when you apply for a home loan for the first time, most banks will lend up to 80% of the property value. First-time buyers will need to put down a 20% deposit. However, when you refinance a home loan, you will own part of the property’s value. How much equity you have will affect the amount the lender will let you borrow.
Remember, you have to pay interest on anything you borrow. If you remortgage equity, it may cost you more than the original loan.
The benefits of refinancing your home loan
Why refinance a home loan? There are many reasons to refinance your home loan.
- Negotiate a better interest rate
- Access more loan features, like an offset account or redraw facility
- Switch to a fixed rate home loan
- Debt consolidation, e.g. role your car loan, personal loan, and other debts into one payment
- Get rid of lenders’ mortgage insurance
- Change repayment frequency
- Change your loan term
Five steps to refinancing your home loan
Are you considering switching home loans to a different lender? Here are five steps to move to a better deal from your current home loan.
Review your current loan
Take a look at your current mortgage and home loan account. Consider a specific refinancing goal, like reducing the interest rate by 1% or getting your transaction account linked to an offset account.
Compare home loans
With your objective in mind, start shopping around for other home loan deals. Speak to a mortgage broker about your situation; brokers can help you find an eligible home loan to meet your needs. Take note of all your options, including the interest rate, comparison rate, and other costs.
Speak to your current lender
Approach your existing lender. When you tell them of competitive rates offered by other lenders, they might be willing to negotiate your home loan account rather than lose your business. If they aren’t interested in negotiating interest rates, ask them about their policies on exit fees.
Apply for a new loan
You will need to submit an application if you choose to refinance your existing home loan with a new lender. Your mortgage broker can help you structure your application. The lender should approve your loan amount if you meet the eligibility criteria.
Sign the contract
Once you’ve received home loan approval, you must sign the loan contract. Then, the new lender will pay off your previous lender and outstanding interest repayments. Going forward, you will pay your new lender the agreed interest rate and monthly repayments.
How much will it cost to refinance a home loan?
While many Aussies refinance their home loan to reduce their monthly repayments, it might cost you more than you save if you’re not careful. Moreover, even if home loan refinancing saves money overall, you should prepare to pay additional costs in the short term.
Here are a few of the costs involved in the home loan refinance process
- Discharge fees: Your current lender might charge you an early repayment penalty or exit fees when you leave your existing loan.
- Application fee: You might have to pay your new lender a home loan application fee when applying for a new loan.
- Valuation fee: Your new lender might charge you to determine the current property value.
- LMI: If you have less than 20% equity, you might have to pay LMI. Even if you already paid your existing lender LMI, you’ll have to pay it again.
- Break costs: If you have a fixed interest rate, you’ll need to pay break costs if you refinance your home loan during the fixed rate period.
The overall costs to refinance a home loan depend on your current lender, new lender, and location.
How can a mortgage broker help in the refinancing process?
A mortgage broker can help you find a new loan, talk you through the refinancing process, and potentially reduce refinancing costs. Brokers have established relationships with a panel of lenders and may offer reduced interest rates or waive a mortgage registration fee.
Mortgage brokers are home loan specialists. They will assess your financial situation and provide home loan refinancing options. Moreover, they’ll talk you through the lending criteria and ensure you avoid home loan application rejections that could hurt your credit score.
Refinancing your home loan
Refinancing your home loan could save you money in the long run. However, without due diligence, refinancing could cost more than it saves. Speak to a Sydney home loan broker with an Australian Credit Licence to refinance a home loan and save money on your mortgage repayments.
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Can I refinance my home loan with the same bank?
Refinancing your home loan with the same bank is called ‘internal refinancing. Speak to your lender about refinancing opportunities. Often, you might save on break costs and exit fees if you refinance your home loan with the same lender.
Is it good to refinance loans?
Refinancing can offer many benefits, such as a lower interest rate or better loan features. However, if you refinance without a specific goal, it could cost you more. If you exit your existing loan early, your previous lender might charge break costs and other fees.
At what point is it not worth it to refinance?
Refinancing often costs a lot in the short term. It could take several years to break even and begin saving. If there isn’t long left on your mortgage repayments, it might not be worth it to refinance your home loan.
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