Thinking about giving your mortgage a fresh start but not quite sure what refinancing actually means?
You’re in good company.
Mortgage refinancing is a common step many Aussies take to get a better deal or adjust their home loan to fit their changing needs.
But navigating the ins and outs of refinancing can feel a bit overwhelming.
Don’t worry—we’re here to simplify it for you.
Let’s unpack what mortgage refinancing is all about in Australia and how it could benefit you.
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Understanding Mortgage Refinancing
What Is Mortgage Refinancing?
Mortgage refinancing is all about replacing your existing home loan with a new one that offers better terms. This could be with your current lender or a different one altogether. The goal? To improve your financial situation—whether that’s through snagging a lower interest rate, accessing new loan features, or rethinking your repayment plan.
Why Consider Refinancing?
Homeowners choose to refinance their mortgages for various reasons:
- Securing Lower Interest Rates: Reducing your interest rate can lead to significant savings on your monthly repayments.
- Shortening the Loan Term: Paying off your mortgage sooner means you’ll pay less interest over the life of the loan.
- Accessing Home Equity: You might tap into your home’s equity for renovations, investments, or other financial needs.
- Consolidating Debts: Rolling high-interest debts into your home loan can simplify repayments and potentially lower your overall monthly commitments.
- Aligning with Personal Values: Perhaps you’re keen to switch to a lender whose values match your own, such as ethical or eco-friendly practices.
The Refinancing Process Explained
Assessing Your Financial Situation
Before you dive in, it’s crucial to take stock of your current loan and financial goals. Review your credit score and overall financial health to ensure refinancing aligns with what you want to achieve.
Shopping Around for the Best Deal
Make use of online comparison tools to weigh up different offers. Look at both traditional banks and non-bank lenders, comparing interest rates, fees, and loan features. This research is key to finding a deal that suits your needs.
Being Mindful of Costs and Fees
Keep in mind that refinancing comes with its own set of costs:
- Discharge Fees: Charges for settling your current loan.
- Application and Valuation Fees: Costs for setting up the new loan and assessing your property’s value.
- Lenders Mortgage Insurance (LMI): If your equity is below 20%, you might need to pay LMI.
The Application Process
You’ll need to gather documents like proof of income, employment details, and information about your assets. Expect a property valuation, and be prepared to fill out application forms for your chosen lender.
Understanding the Risks
Refinancing can affect your credit score due to the required credit checks. Additionally, extending your loan term might lead to higher total interest payments over time. It’s important to weigh the upfront costs against long-term savings to make an informed decision.
The Benefits of Refinancing
Lower Interest Rates
Securing a lower interest rate can significantly reduce your overall loan costs. Use refinancing calculators to estimate how much you could save.
Adjusting Your Loan Term
If you’re in a better financial position now, you might consider shortening your loan term. While your monthly repayments could increase, you’ll pay less interest in the long run.
Accessing New Loan Features
Refinancing offers the chance to switch loan types—for example, moving from a variable to a fixed rate. You might also unlock features like offset accounts or the ability to make extra repayments.
Simplifying with Debt Consolidation
Combining high-interest debts into a single, lower-interest home loan can streamline your repayments and reduce your monthly expenses.
Aligning with Your Values
Refinancing gives you the opportunity to choose a lender that aligns with your personal beliefs, whether that’s focusing on ethical lending or supporting environmental initiatives.
Steps to Refinance Your Home Loan
Do Your Homework
Start by reviewing your current mortgage details. Look out for any break costs or exit fees so you’re fully aware of the financial implications.
Get a Property Valuation
An up-to-date valuation helps you understand your property’s current worth, which is crucial for calculating your loan-to-value ratio (LVR).
Submit Your Application
Gather all necessary documents and submit your application to your chosen lender. You’ll go through stages of conditional approval followed by unconditional approval.
Finalise the Settlement
Once approved, your new lender will pay out your old loan, and your property’s title deeds will be updated to reflect the new lender’s interest.
Timing and Key Considerations
When Is the Right Time to Refinance?
Refinancing is often ideal when you have at least 20% equity in your home to avoid LMI. It’s also wise to consider refinancing before scheduled rate changes, such as the end of a fixed-rate period.
Understanding Costs and Timeframes
The refinancing process can take anywhere from a couple of days to several weeks. Be prepared for costs like discharge fees, application fees, and valuation fees.
Impact on Your Financial Health
Refinancing generally has a minimal impact on your credit score unless you make multiple applications in a short period. It’s a good idea to review your home loan every few years to ensure it remains competitive—a bit like a financial health check.
Top Tips from the Experts
Keep an Eye on Loan Terms and Fees
Compare the remaining term of your current loan with new options on the market. Factor in all potential fees to calculate your net savings and make sure refinancing is the right financial move.
Seek Professional Advice
Regular consultations with a home loan specialist can help you navigate the refinancing process smoothly. They can assist with comprehensive reviews to keep your loan aligned with your financial goals.
Additional Things to Consider
Equity Requirements and LMI
Aim to keep your LVR below 80% to avoid paying LMI. Also, stamp duty typically isn’t required unless there’s a change in the property’s ownership details.
Weighing Up the Pros and Cons
Pros:
- Potentially lower interest rates
- Opportunity to adjust your repayment plan
- Access to new loan features
Cons:
- Possible break costs from your current loan
- Application and discharge fees
- Risk of paying more interest if the loan term is extended
Insights from Industry Experts
Stephen Zeller’s Perspective
Stephen Zeller, a home loan expert, highlights the importance of thorough research and regular financial check-ups. He advises leveraging expert guidance to effectively navigate your refinancing options.
Where to Find More Information
If you’re keen to dive deeper, consider exploring:
- Comparisons between fixed and variable rate home loans
- Detailed information on LVR and LMI considerations
- Broader financial product comparisons available through resources like Compare the Market
Common Mistakes to Avoid When Refinancing
Not Comparing Enough Options
Don’t fall into the trap of not shopping around. Different lenders offer varied rates and terms, so it’s crucial to compare multiple options to find the best deal.
Overlooking the Fees Involved
A lower interest rate might seem appealing, but make sure you factor in all the associated fees. Application fees, discharge fees, and other costs can add up and might offset the benefits of a lower rate.
Extending the Loan Term Without Thought
While extending your loan term can reduce your monthly repayments, it could increase the total interest you’ll pay over time. Consider the long-term implications before making this decision.
Neglecting Your Credit Score
Your credit score significantly influences the interest rates available to you. Before applying for refinancing, check your credit report and take steps to improve your score if necessary—a better score can lead to better loan terms.
Ignoring Loan Features
Don’t focus solely on the interest rate. Loan features like offset accounts, redraw facilities, and flexible repayment options can provide additional benefits and should be part of your comparison.
Bringing It All Together
Refinancing your mortgage can be a smart move to enhance your financial well-being, but it’s important to understand every aspect of the process. By doing thorough research, considering both the advantages and potential pitfalls, and seeking professional advice, you can make a decision that aligns with your financial goals and sets you up for a more secure future.