Although you’ve been through it before, it’s good to be prepared before refinancing a home loan. If you haven’t done so already, the first step is to determine why you want to refinance your home loan. Once you’ve done this, you can take steps to prepare to refinance.
What is home loan refinancing?
When you refinance your home, you get a new mortgage with another or your existing lender. Getting a mortgage from a new lender is called external refinancing, while one from your existing lender is called internal refinancing. Home loan refinancing is usually done a few years into the term of the existing mortgage.
Reasons for refinancing a home loan
Interest rates. Interest rates are at the top of the list of reasons to refinance. With rising interest rates, you might want to avoid potential future rate rises if you currently have a variable-rate home loan and switch to a fixed-rate home loan. When interest rates are decreasing (hopefully soon again) is also a time to look at saving money with a new home loan.
Also, first-home buyers often pay higher rates to enter the property market, and refinancing can be a way to get a better deal.
Before choosing a new home loan, you will want to make sure you’re making an accurate comparison. Home loan comparison websites list an ‘interest rate’ and a ‘comparison rate’. The comparison rate takes loan fees into account, so it’s a more accurate reflection of costs when comparing loans. While the comparison rate is a starting point, there are other factors, including fees and charges, to consider when you compare home loans. For more information on comparison rates, check out Every Single Thing You Should Look For When You Compare Mortgage Rates.
You will also want to consider all the other fees and other potential costs when weighing the benefits of refinancing a home loan, which include:
- Loan application and establishment fee – a one-time cost when setting up a new home loan.
- Settlement fee – this covers the costs of administration to settle the loan.
- Variation fee – this is charged when you stay with the same lender but switch your loan product.
- Discharge fee – the fees that can be charged for releasing you from your current home loan.
- Valuation fee – for a professional onsite property valuation required by lenders. Lenders who might do an online valuation at no additional cost don’t always require this.
- Lenders Mortgage Insurance – this only applies when required by the lender. For example, an LMI policy will most likely be required when the amount you want to borrow is above 80% of the property’s value (as determined by a professional valuation).
While the fees can add up, refinancing can save you money over the long term. Also, the home lending market is competitive, so lenders often reduce or eliminate fees or offer other incentives. Mortgage professionals, like those at Reduce Home Loans, keep up to date with the mortgage loan market and help you find the best deal.
Features. Your current home loan might be the ‘no frills’ variety without added features. These include things like an offset account or a redraw facility. Both options can help you reduce interest payments and repay your mortgage sooner. Maybe you didn’t know about the features or didn’t think they were important at the time.
Paying off debts. If you have outstanding debts – such as car loans, personal loans and credit cards, refinancing your home loan can be a way to consolidate these debts and reduce the interest you are paying. While there are differences between lenders in how they view consolidating multiple debts, debt consolidation is a convenient feature available with some home loans.
Renovation. If you have built up equity (the difference between its value and what you owe on the mortgage) in your home and you are considering renovating, home loan refinancing can help you unlock the value of your home to renovate.
Purchasing a car. It’s possible to use the equity in your home to purchase a vehicle. You can get more flexibility and a better interest rate by doing this. A car loan will have a shorter term, higher interest rates and higher repayments when compared to the repayments over a longer-term mortgage. You’ll want to consider the pros and cons of refinancing your home to purchase a car.
Investing. If you are considering investing and you’ve built up equity since purchasing, you could refinance your home to invest in property.
Getting prepared to refinance your existing home loan
Once you’ve clarified the purpose of refinancing, you can start preparing to make the process run smoothly and increase your chances of success.
Review your current financial situation. When it comes to refinancing a home loan, equity is your friend. When considering the risk of lending, equity is something the lenders consider. When you have more equity in your home, you’re more likely to get a good deal when refinancing.
You will also want to consider the amount you can afford to comfortably repay if you want to increase your home loan amount for renovation, debt consolidation, or other reasons.
Check out your credit score. Lenders do this, as it represents your credit history and creditworthiness. A higher score makes you look better in the eyes of lenders, so it’s important to know where you stand with your score. Check your credit file to make sure it’s accurate. If there are any mistakes on your credit report, you can get in touch with the credit provider and credit reporting agency to investigate the information you think is not correct. For example, if you have always made monthly repayments for your credit card on time, but your credit report shows late payments, you will want to correct this. Have the information ready from your credit provider to present to credit agencies when disputing any negative marks on the report.
Another point to keep in mind is credit checks can affect your credit rating. If you are speaking with several potential lenders, and they each do a credit check, it will impact your score. The mortgage lending experts at Reduce Home Loans can guide you through the process and avoid mistakes that could negatively affect your credit score.
Reduce your outstanding debts. Any outstanding debt besides your existing mortgage is considered when making lending decisions. If you can, pay off credit cards and other consumer debt. Your debt limits are also considered. For example, if you have a credit card with a $2,500 credit limit but only need a $1,000 credit limit, contact the credit card provider to lower this limit. If you are considering refinancing to consolidate your debts, lenders will take this into account when analysing your financial situation.
Spruce up your home for valuation. The estimated value of your home will determine how much you can borrow. You might not have a large budget, but simple things like painting, cleaning, decluttering, and landscaping can add to the valuation. Improving the “curb appeal” by making improvements to your front yard and home exterior can help you get a higher valuation.
The amount of the new loan will be based on the loan-to-value ratio. For example, if the loan-to-value ratio is 80% and you can add $50,000 to the value of your home by making minor improvements, you will be able to get an additional $40,000 on the loan amount than without making the improvements. Sometimes, a better valuation can help you avoid paying lenders’ mortgage insurance (LMI).
Get your finances in order. In recent years, lenders have become more scrutinous when looking at your finances. They will want to see your bank statements to understand your spending habits. Too much leisure spending – such as holidays and expensive meals out – might give the impression of poor spending habits. For this reason, it’s a good idea to reign in your spending when you are considering refinancing your home loan.
Home loan refinancing is on the rise in Australia
While it might seem complex, home loan refinancing could be the right choice for you. More Australians are now refinancing their home loan. In November 2022, the value of owner-occupier refinancing between lenders rose to a new high of 9.1%, an increase of $13.4 billion. In addition, a survey of 1,000 mortgage holders revealed that 31% are considering refinancing in 2023. Among the respondents, 58% refinanced to get a better interest rate, and 35% did it to reduce repayments. Given the popularity of refinancing home loans, now might be the time to consider home loan refinancing.
Get professional advice about home loan refinancing
The mortgage experts at Reduce Home Loans are dedicated to assisting borrowers looking for better home loan rates. We guide you through the refinancing process to avoid any surprises.
Get in touch with one of our helpful experts to discuss your situation and goals, and the options for refinancing your home loan.
Any statements are general in nature and do not take into account your financial personal situation, objectives or needs. You should consider whether any statement/s is suitable for you and your personal circumstances. Before making any financial decision, consider your circumstances and the product disclosure statement.