What IS Refinancing?

The home loan market today is very competitive, and interest rates are at all-time lows. Many Australian’s have already saved thousands on their mortgage by refinancing. But what does refinancing actually mean?

Refinancing is the process of replacing your existing home loan with a new home loan, often with a lower rate and different terms. The most common reason people choose to refinance is to reduce their monthly mortgage repayments and to minimise the amount of interest they are charged on their home loan.

Sounds good, right?

Before you jump into refinancing, you will need to consider the pros and cons to determine whether or not you could benefit from refinancing your mortgage.

The Benefits of Refinancing

Refinancing your home loan can allow you to:

Reduce Monthly Repayments

Perhaps the greatest benefit of refinancing is that many homeowners will be able to reduce their monthly mortgage repayments. This depends on the mortgage terms, but it could also reduce the amount of overall interest to be paid over the remaining life of the mortgage.

Pay off Your Mortgage Sooner

When getting a new loan to replace your current one, another one of the benefits of refinancing is that you could shorten your mortgage term. This means that instead of paying for another 30 years, you could reduce it to a 15-year mortgage if you could handle the payments. Your payments will become larger but you would have to pay less overall.

Secure a Fixed Rate Loan

Another one of the very good reasons to refinance is that it can give you a predictable mortgage payment each month. With an adjustable rate mortgage, you really are at the mercy of the economy. You can break that trend and enjoy the better benefits with a fixed rate loan, letting you sleep more soundly at night.

Consolidate Your Debts

Financial advisors suggest that if you have more than three debts, then it’s time to consolidate. The good news is you can often refinance your home loan and roll all of these debts into one. However, the key when doing this is to make sure that you pay more than the minimum repayment. Otherwise, you will find that your other loans cost you far more than you anticipated.

The Costs of Refinancing

Exit fees

Before you go after that new home loan, you want to take a good look at the fine print on your current one. This may include a clause that says if you repay the mortgage off early, you may have to pay an exit fee.

Although this fee is no longer allowed, mortgages were taken out prior to 1 July 2011 may have it in the agreement.

The fee may be calculated in different ways, depending on the lender. It is often a percentage of how much is still owed, or it could be a pre-set amount. If you have a question about it, be sure to ask your lender. If applicable, this fee could be considerable and you need to know what the cost will be before deciding on refinancing.

Loan Application Fees

A loan application fee is applied when you apply for the loan and is a fee charged to cover the application of your loan, including property appraisals, credit history checks, property appraisals and general administrative costs.

Valuation Fees

A valuation fee is charged by your lender and covers the cost of a basic inspection or your property. The purpose of the inspection is to determine whether or not your home is safe security to lend on.

Settlement Fees

A settlement fee may be applied by your lender to close out your current mortgage to cover their work with regard to the settlement.

Some agents charge a fixed fee, while others charge based on the value of the transaction. The fee is usually greater for a purchase transaction than for a sale, because there’s more work involved.

Lenders Mortgage Insurance

Lenders Mortgage Insurance (LMI) protects your lender against your default. LMI is a one-off insurance payment which and is paid if you are taking out a mortgage that is greater than 80% of the value of your home (LVI).

If your home has dropped in value recently, you may not have enough equity in it to be able to avoid LMI, which can make your monthly payments uncomfortably larger.

What to Consider First

Before refinancing, it is important to critically analyse your current home loan by following these simple steps:

  1. Get a Copy of Your Home Loan Contract
    Take note of your interest rate type, read through the terms and conditions, fees and charges, and your home loan features.
  2. Find out Your Current Interest Rate
    Log into your internet banking and select your home loan account details.
  3. Get a Refinancing Report
    Your personalised refinancing report will calculate your potential savings from refinancing, the lowest interest rate available to you, and the number of lenders you qualify for. Get your Refinancing report.
  4. Compare the Market
    Take note of the loans that have features similar to yours and then compare interest rates. Be sure to consider the comparison rate, as this will give you an accurate indication of the potential costs involved. Start comparing interest rates.

Lastly, consider the following:

  • The home loan features you want – such as redraw facilities, offset account, and mortgage portability
  • All costs associated with the loan
  • The customer support and service offered by the lender

When Refinancing CAN Make Sense

In order to make any real savings, you will need to find a home loan that is at least 1 percent lower than your existing rate. A 1 percent reduction on a $300,000 loan can save you around $3,000 a year, which makes switching home loans viable.

If you feel that everything is better than you currently have, then find out how much you could save compared to your current home loan.

When Refinancing Might NOT Make Sense

The main purpose of refinancing is to be able to save money. This makes it necessary to sit down and do the math.

Extended Loan Period

Be sure to do the short-term calculations and the long term ones. Getting a lower interest rate for a 15-year loan may produce lower payments, but it may also extend your loan period, which will likely mean that you will pay more in interest.

Decreased Property Value

There also may be a problem with the value of your home. If you purchased your home for $250,000, for example, and you had $40,000 in equity, but the house is now worth only $215,000, then you only have $5,000 in equity now. Unless you can come up with the 20 percent required as a down payment, you will need to pay for Lender’s Mortgage Insurance (LMI). This is likely to raise your monthly payments rather than give you a better deal.

These factors reveal why you need to do some thorough calculations to determine if it really is in your best interest to refinance your home.

Should You Refinance with the Same Lender?

Before refinancing your home, be sure to talk with your current lender to determine how much it will cost to get out of your current mortgage. It may be costlier than you realise. You should also know that refinancing through your original lender could be less expensive because they may not ask for some of the same fees and services, such as a property appraisal or a title search, etc. They also may just want to keep you as a customer and offer you the better deal you want.

Qualifications Needed to Get a Better Rate

A Good Credit Score

Refinancing your home for a better deal requires that you have good credit. If your credit situation has changed, and it is not as good as it was when you obtained your original mortgage, you may want to raise your credit score before applying.
The most important factor in raising your credit score is to make sure that you pay your bills on time, and always for at least the minimum amount.

Some lenders, such as Pepper Money, Bluestone, Liberty, Victoria Mortgage Group and Keystart consider more than just credit scores when approving loans. Apply with these lenders will give you a better chance of being able to refinance.

Stable Income

Another situation that may put you into an automatic high-risk category, would be if you are now self-employed. Lenders often consider this to mean that you now have an unstable income.

Low doc loans are designed for the self-employed and small business owners who may not have the financial statements and tax returns usually required when refinancing.