Should You Refinance Your Home Loan?

Our personal and financial situations change over time, as do the mortgage products, pricing and features we choose. But how do you know if it’s time to refinance your home loan? 

If you’ve had your home loan for some time, it’s worth thinking about whether your home loan matches your lifestyle and needs. If you’ve been thinking about refinancing your home loan, now could be a good time to dig into it.

Why refinance in the first place?

Switching home loans could save you money each month in repayments or potentially free up existing equity (cash) in your home. You could use this equity to add value to your home through renovations, or even towards an investment property. Refinancing your home loan could also help you pay off your loan faster or consolidate debt if you need to.

What exactly is home loan refinancing?

Before we jump into the details, let’s start with what it means to refinance your home loan. Refinancing essentially means moving your home loan from one lender to another. From the new lender’s perspective the home loan is considered an entirely new loan, so there will be some paperwork involved. Your existing loan is closed out at your current lender and paid out by the new lender.

Before you decide to refinance

Know your credit score

As with any application for credit – and mortgages are no different – your credit score can play a role. Lenders may use your credit score to decide whether to lend you money, and how much. 

Knowing your credit score and the factors that contribute to it is important. Your credit score is based on personal and financial information that is kept on your credit file. Every time you apply for credit, there will be a credit report written about you. This report is housed at a credit reporting agency such as Experien, ilion and Equifax. You are entitled to request a copy of your credit report at any time. You can also get your credit score for free from an online credit score provider, such as Credit Simple, Finder or Canstar. Your credit report will also contain a rating. 

Your credit rating is based on:

• How many times you have applied for credit
• Whether you pay on time
• The amount of money you have borrowed.

This information is considered by lenders. Before you decide to refinance your loan, it’s worth getting a copy of your credit report to look at your credit score and decide whether this is going to help or hinder your application. 

Do some research on the type of loans out there

Our circumstances change so it’s important to choose a loan that suits your needs. As part of your refinancing journey, you should think about what type of loan term and type might be best for you. 

When it comes to loan types, there are:

• • Fixed interest rate loans, where you have fixed interest repayments for a fixed term. 
  • Variable interest rate loans, where your interest rate can change over the loan term.

• Split loans: a mix of fixed and variable loans to suit your personal needs.

There are pros and cons to all loan types so it’s important to make sure you understand each and can have a conversation with a home loan professional about what’s best for you and your circumstances. 

If you’re currently on a certain type of home loan and see a better rate or loan term out there that you think might be more suitable for you, it’s worth looking to refinance your home loan.

How do I refinance my home loan? 

1. You’ll need to complete a standard application process with your new lender. Part of the application process includes a ‘loan discharge’. This can take a few weeks depending on the provider so it’s best to get this process started earlier in the process.

2. Refinancing home loan requirements also include a valuation of your property. This is normally organised by your new chosen lender. You’ll also need to go through an application process. This can either be done in a branch or online with a provider like Well Money. 

3. You will also need statements on your current home loan, as well as a payout figure, which is the total amount left to be paid on your loan to your current lender. This can either be obtained from your current lender or found on your internet banking dashboard. 

4. Once the process is complete, a settlement date will be organised. This settlement date is the date that the mortgage title is transferred between the two lenders. You can celebrate this if you want!

When is the best time to refinance your home loan?

There isn’t really a best time to refinance your home loan but there are factors you can consider to make a decision. Home loan interest rates change frequently depending on lenders and your personal circumstances also change. If you’re not sure if now’s a good time to refinance, it’s always a good idea to have a home loan health check with your lender to see where you’re currently at and whether you could be getting a better deal. 

As we mentioned earlier, homeowners looking to refinance typically fall into one of four categories:

1. Unlocking equity in their home for renovations or other uses
2. Shortening the length of their loan period
3. Paying less per month on their mortgage (reduce their interest rate)
4. Consolidating their debts into one loan 

Depending on your reasons behind wanting to refinance, you’ll want to find a lender that fits your objectives, which is why it’s important to look around and then speak to a home loan professional about your individual circumstances.

What to consider before refinancing

How much you owe on your current mortgage

If you currently have a LVR (loan-to-value ratio) of more than 80% meaning you have borrowed more than 80% of your home’s value from the lender, it may be a better idea to consider paying your existing loan down. If you refinance, you’ll likely incur lender’s mortgage insurance (LMI) with your new loan. LMI is a one-off insurance premium payable to the lender to allow you to borrow more money. This is a sliding scale depending on your home’s value and added to the loan itself. However, it still could be significant enough to warrant staying on your current loan and paying it down below its 80% value before thinking about switching. If you’re not sure, it’s still good to ask. The market is always changing so it’s worth asking your lender for a valuation to check in on your home’s value.

The total fees and costs

There are fees and costs associated with switching loans which may outweigh the benefits. 

What features you find helpful

There may be some features of a new preferred loan that don’t meet your current loan requirements. For example, you might be looking into fixing your home loan at a lower rate but at the cost of your offset account. Offset accounts are a great way to save and pay your home loan down at the same time so this feature could potentially be more desirable and work out cheaper in the long run than locking in a smaller interest rate today. These are all considerations to discuss with your potential lender.

Here are some common questions people ask about refinancing costs and some answers from our preferred lender, Well Money.

How much does it cost to refinance a home loan?

The cost of refinancing a home loan is something to consider in your decision to refinance. While you won’t face the same costs as you did when buying your home initially, such as borrowing costs and stamp duty fees, common refinancing costs include:

• Mortgage application fee (range between $250 – $1000)
• Property valuation fee ($0 – $300)
• Discharge fee for termination of mortgage ($200- $1000)
• Break cost – breaking your fixed rate mortgage can be a costly exercise. Speak to your mortgage professional before proceeding.
• Settlement fee – ($100 – $800)
• Mortgage registration fee ($100 – $180)
• Exit fee ($0- $1000)

Does refinancing make you pay more interest?

This depends on why you are refinancing in the first place. If you are looking to pay off your home loan faster or consolidate other debt into your mortgage, your loan may require you to pay more interest to achieve this. It all depends on your personal circumstances. 

Is refinancing right now a good idea?

Australia is currently experiencing record low interest rates. While this is a good news story for borrowers, it’s still important to check you are getting the best deal for your needs. We always recommend a home loan health check. 

Is it worth breaking a fixed rate mortgage?

The benefit of a fixed rate mortgage is that you lock in an agreed rate for a fixed period of time. Part of the agreement is that you won’t break this contract until the fixed term part of the loan is complete. This can be anything from 1 year to 5+ years. If you decide to break this contract, the fees can be very costly. This is determined by your lender and takes a number of factors into account including how long you’ve had the loan, how much you have paid back and more. Getting a break cost estimate from your current lender can help guide you as to whether breaking a fixed rate mortgage is worth it.

Where can I find a mortgage refinance calculator?

Our favourite calculator is this one from Well Money. For best results make sure you’re using your current rate and any monthly or annual fees to get the best picture of how much you can save on refinancing your loan. Your lender should be able to provide this to you. 

Generally, home loan refinance offers peace of mind in knowing you’re on track when it comes to one of the biggest investments you’ll make in your life: your home. Why not book in for a home loan health check with your current lender or visit Well Money for a free 30 minute discussion.