Refinancing

The what, why and how of refinancing home loans

Toni Mladenova
Dec 19, 2020
Yard Financial Pty Ltd | ACN 623 357 513 | Australian Credit Licence 509481

Table of Contents

Make sure you are not overpaying on your home loan by regularly looking at how refinancing might help you. By doing this, you can save money, get a better interest rate, access your equity or add features like an offset account. 

Whatever your reason for home loan refinancing before you go shopping around, it would be beneficial to get a better understanding of your options and what is involved.    

Why might you want to refinance your home loan?

There's a range of reasons you may consider refinancing from saving money on mortgage repayments to consolidating your debts or even accessing your equity. No matter your reason, there are different benefits to all.

Save money on interest

Interest rates often change, and lenders are always offering deals to entice new customers, so it's not hard to find an offer that will save you money. 

You can also go back to your current lender and see if they are offering better interest rates to new borrowers. If they are, give them a call and see if they will provide you with the same deal.

Switching to a new lender comes with costs, so if you can call your current lender and negotiate a better deal, it can make refinancing simpler.

Consolidate your debts

One of the main reasons people look into refinancing their home loan is because they have accumulated other debts and want to consolidate them. Whether it's a car loan, credit card or personal loan consolidating your debts not only simplifies your finances but can also save you money.

The interest rates offered on home loans are often lower than other debts, which makes consolidation a viable option. Interest rates may be lower, but a home loan is a longer-term debt which means you may end up paying more interest in the long term.  

Release equity

If you have a principal and interest home loan, your repayments have been building something called equity. And once you have built up some equity, you can then refinance to access and withdraw this equity and spend that money now. 

There are a few reasons you may want to access the equity in your property. The first would be to do renovations on your existing property to fix anything that may have been damaged or worn down over time. Renovations such as updating your bathroom or adding solar panels also adds value which add equity to your property.

Another reason you might want to access your equity is to build your property portfolio by purchasing a second property. Using the equity from your current property, you may be able to pay a deposit and the upfront costs for the purchase of another property. But only if you've built up enough equity to cover these costs.

Access new home loan features

When you first took out your home loan, you may have only needed a basic no-frills loan with low fees and a low-interest rate. You're now a few years in and are thinking about how other features could help you to repay your home loan sooner and organise your budget. 

Whether it's an offset account, redraw facility, cashback offer or some other attractive home loan feature before you jump at fancy features, do your research. You want to get a home loan that suits your needs, not just one with an attractive offer.  

Moving to a new home

If you've decided to move to a new property, you may be able to take your home loan with you. But this may also be an excellent opportunity to review your current home loan and see if you can get a better deal. 

Reorganising your finances

You might have a principal and interest home loan and need to switch to an interest-only home loan for a while, or you may have a variable rate home loan and want to change to a fixed rate. Or you might just want to bring all your finances to the same financial institution. 

Getting a handle on your finances is always a smart decision and refinancing your home loan is just one of the options you have.

Things to consider before you refinance your home loan

Just like the above reasons to refinance your home loan, there are some reasons now might not be the best time to refinance or change your home loan.

Will you have to pay break costs?

If you have a fixed rate home loan and the fixed term hasn't expired you will incur break costs when you refinance. These costs are often relatively high and are best avoided if you can.  

Is your equity too low?

If you originally borrowed more than 80% of your property's value, you would have paid lenders mortgage insurance (LMI). If you want to refinance, you will need to have built up at least 20% equity, or you will be asked to pay another LMI premium.

Consider whether the savings you might make by refinancing outweigh the additional costs such as LMI.  

Has your property’s value decreased?

The property market is often seen as the "safest" investment due to its usual stability or the tendency for property values to increase. The market also has downswings, and if you look to refinance your home loan during this time, you may not end up saving any money in the long term. 

It would be better to hold off until there is a shift in the market that increases your property value.

What are the costs of refinancing your home loan?

Refinancing your home loan is a reasonably straightforward process, but it does come with some fees that you will need to pay.

  • Upfront fees - Depending on the lender and loan, you will likely be asked to pay for application or settlement fees.  
  • Variation fee - If you are refinancing but staying with your current lender, they may charge you a fee for changing to a different loan product.
  • Valuation fees - Your new lender will need to get your property valued, and they may charge a fee for this valuation. Most lenders will try to do this valuation online at no cost to you. Sometimes an in-person valuation can't be avoided, and some valuations come with fees.
  • Discharge fees - Your current lender will charge you fees for discharging or releasing you from your existing home loan. 
  • Government and other external fees -  Check with your lender what government fees you will be expected to pay. Likely fees that apply include mortgage registration, mortgage deregistration, PEXA and title search fees when refinancing.

How do you refinance your home loan?

You've thought about why you would or wouldn’t want to refinance, the costs that may be involved, it's time to get down to how refinancing works.

Assess your current situation

Before you jump into the process of home loan refinancing, it would be best to take a look at your current situation and see where you’re at. 

  • How much have you paid off your mortgage? 
  • What fees are you currently paying? 
  • What's your current interest rate and mortgage structure? 
  • What refinancing risk will there be? 
  • Will you actually save money by switching mortgages?

Once you have a good overview of your current situation, you can move onto getting to know what your options are for home loan refinancing.

Research your refinancing options

Do as much research as possible. There are many home loan options available with different interest rates, fees, loan structures and features. 

One great tool that will help you with your research is a refinancing calculator, it enables you to compare the old and new home loan to see how much you could save.

The refinancing process

Once you have reviewed your current position and done the research to find a new home loan that has all you are looking for, it's time to refinance your home loan. 

Switching lenders vs staying with your current lender

The process for refinancing your home loan is slightly different if you stay with your current lender than if you switched to a new lender. 

Keeping your mortgage with your current lender may be more straightforward as you don't need to change any details and you may save on fees depending on your lender. However, you may get a better deal from a new lender as most home loan lenders offer their best deals to new customers. 

Before you jump ship to a new lender, give your current lender a call and see if they will match any offers from other lenders. 

The home loan application process

When you are refinancing your home, you still need to put in an application, even if you're staying with your current lender. 

At Yard, you can put your application through online, and one of our home loan consultants will call you within 24-hours to talk you through the rest of the application process. They will let you know what supporting documentation is required as part of your application. 

You will then need to submit the supporting documentation including:

  • Personal identification information
  • Proof of income
  • Assets and liabilities information
  • Bank statements or tax returns
  • Other documentation such as details of your current mortgage and evidence you have kept up repayments

After these documents, and any other documents requested by your loan consultant, have been received Yard will conduct a property valuation. This is to validate your estimated property value and will be done online, depending on your loan-to-value ratio (LVR). If there isn't sufficient information to complete the valuation online, an in-person valuation will be done.

Once the valuation is complete, and our credit team reviews the valuation report, we will make an assessment on your application. If approved, we will send you through your loan documents via email for you to read, sign and return.

Discharging and settlement of your home loan

Once your new home loan is approved, your previous home loan will need to be discharged. The two lenders will go through this process without any input from you, your new lender will send a discharge form to your previous lender. They'll exchange all the necessary documentation and process the title transfer for you.

Your new home loan will then enter the settlement stage, and your new lender will work with your previous lender to pay out your old home loan. If you have accessed your equity, you should also receive these funds or be told how to access them. 

As you can see, the actual process of refinancing your home loan is pretty simple. Still, you don't want to skip over all the research and analysis before you pull the trigger. The more informed decision you make, the better off you are likely to be. If you have decided home loan refinancing is right for you, make sure to check out Yard's range of home loans.

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