If you’re feeling trapped by high loan repayments, it’s time to know how to refinance a home loan. Home loan refinancing can help you get lower interest rates and save thousands of dollars in interest payments.
Are you ready to take control of your loan? Here, you’ll understand how refinancing works, the step-by-step process of refinancing, its pros and cons and the mistakes you should avoid when switching home loans.
What is home loan refinancing?
Home loan refinancing is the process of taking out a new mortgage to replace your existing home loan. When you refinance your loan, you can either do it with your current lender (internal refinancing) or with a different one (external refinancing).
Australians choose to refinance their home loans due to different reasons, including getting a lower interest rate, changing loan terms and repayment structures, tapping into equity, consolidating debts and more.
Whether or not you’ve refinanced before, carefully consider all your home loan options and do your research before committing to a new loan to ensure that you reap and maximise the benefits of refinancing.
How to refinance a home loan?
Home loan refinancing can be quite complex and intimidating at first, but understanding the process is a great way to secure a better deal, save more and achieve your goals:
Step 1: Determine your current situation and home loan
The first and most important step before switching your home loan is to assess your financial situation, goals and current loan package. Do a health check on your loan. What’s your current rate? Why do you want to refinance your mortgage? What do you like and don’t like about your current home loan?
For instance, you can consider these factors:
- Current interest rate and loan features
- Remaining loan term
- Whether you have a fixed, variable or split loan
- Ongoing fees you’re paying
- Possible costs you may incur by exiting your loan
Having a clear idea of what you’re looking for in a home loan helps you find the right loan product that suits your needs. Then, get in touch with your current lender and try to negotiate your terms. They may be open to offering you a lower rate.
If your lender doesn’t budge, it’s time to refinance and make the switch.
Step 2: Compare lenders and offers
After determining your situation and refinancing goals, compare home loans and different lenders to make sure you get the best available deal out there.
When comparing your options, be sure to look beyond how the interest rates affect your repayments. Compare the fees and charges and the features that are important to you. Make sure that your options are better than your current home loan.
As this can be time-consuming, it’s a great idea to have a home loan specialist to guide you through the refinancing process. Aside from their expertise and connection with various lenders, they offer their services for free.
Book a free consultation with It’s Simple Finance’s mortgage brokers as they will happily assist you and secure you the loan that suits your needs and goals.
Step 3: Submit your application
Once you’ve chosen the right loan product and lender, it’s time to submit and complete your loan application. There are 3 ways you can apply for a home loan – online, through a mortgage broker or a personal visit to the lender.
The process is quite similar to your home loan application process. Once you’ve agreed to the terms of the loan, it’s time to complete the loan application. You need to provide documentation, such as proof of income, assets and identity. Also, you may be required to pay application fees.
Your chosen lender will assess your application, check your credit and possibly conduct a valuation to know how much your property is worth. This can take several weeks, depending on the lender and your application.
Step 4: Wait for the loan approval
If your loan is approved, the lender will offer the loan and provide the details of the terms and conditions. Make sure you carefully review the loan documents before signing them to avoid any regrets later.
Step 5: Settlement
Once you accept and sign the loan contract, your lender will finalise the loan and arrange a settlement with your current lender. Based on your circumstance, you may need to pay fees associated with the loan.
You’ve successfully refinanced your home. It’s time to say goodbye to your old home loan and begin with a new and better one.
Advantages and disadvantages of refinancing
To help you decide if refinancing is the right way, here are some of the pros and cons of refinancing:
- Save money: One of the main benefits of refinancing a new home loan is to secure a lower interest rate. Since the lending market is competitive, shopping around for better deals can help you find a lender that offers lower interest rates. In turn, this reduces your repayments and saves you thousands in interest over the life of the loan.
- Access loan features: Another advantage of refinancing is getting access to loan features, including offset accounts and redraw facilities. An offset account is directly linked to your home loan and reduces the interest you pay. Meanwhile, a redraw facility allows you to access extra payments you’ve made towards your loan.
- Tailor loan terms based on current circumstances: Refinancing also allows you to adjust your loan term to help you cope with your changing life situation.
- Cashback offers: Other than possibly securing a lower rate and decreasing your repayments, you may also qualify for refinancing cashback offers based on your lender’s criteria. For example, if you refinance with It’s Simple, you may be eligible for up to $5,000 cashback.
- Tap into equity: If your home’s value has increased, and you’ve built equity in your property, refinancing allows you to borrow against this equity, which can be used to fund home renovations, investments, holidays and other major purchases.
- Fees: One of the main drawbacks of refinancing is the costs you may incur. Depending on your situation and lender, you may be required to pay a discharge fee, valuation fee and Lender’s Mortgage Insurance (LMI) if your loan-to-value ratio (LVR) is greater than 80%.
- Break cost: If you refinance your fixed rate home loan before the end of the agreed period, your lender may ask you to pay break costs.
Mistakes to avoid when refinancing
As refinancing is not a one-size-fits-all approach, making mistakes can cost you more in the long run. Here are 5 common mistakes you should avoid when refinancing a home loan:
- Only looking at the interest rates: One of the biggest mistakes that borrowers make is focusing only on the interest rates. While they highly affect your loan repayments, you may overlook the terms, costs and charges associated with refinancing when you only compare the rates. In turn, it may leave you in a worse situation.
- Not shopping around: The market is competitive, so not looking out for your options can rob you of lower interest rates and better features. You can use our loan repayment calculator to find out how different interest rates from different lenders affect your repayments.
- Falling into the honeymoon rates: Some lenders advertise their introductory rates to attract customers. So, look at the standard interest rates that lenders offer to see what you may pay in the long run.
- Not paying attention to the comparison rate: The comparison rate shows you what the overall cost of the loan will be after including any additional fees and charges. Looking at the comparison rates can help you gauge which lender will offer you higher savings overall.
- Extending your loan term: In some cases, stretching the loan term might be necessary to accommodate your situation. However, refinancing to another 30-year home loan increases the interest you pay over the life of the loan, so you may end up paying more than saving by refinancing.
How long does it take to refinance your home loan?
Refinancing can take time depending on your situation and lender. If everything goes right, the process may take a week, but it can go longer.
How much does it cost to refinance your home loan?
As mentioned, refinancing involves fees that you should take into account, including:
- Break costs – when you end your fixed rate loan before the agreed term expires
- Loan application fee – when you apply for a new loan
- Valuation fee – when your lender requires a valuation to check the current value of your home
- Settlement fee – when you pay out your existing loan
- Lenders Mortgage Insurance – when your home equity is below 20% or your LVR is above 80%.
Ready to take control of your loan?
Home loan refinancing can either save or cost you more depending on your situation, timing and strategy. It’s important to understand your financial situation and goals, carefully do your research, consider your options and assess the long-term impact of refinancing. By doing these things, you can use refinancing to your advantage and improve your finance.
To prepare and control your home loan, get in touch with our mortgage brokers to get expert help from the start and beyond. It’s Simple will help you break down your options, enjoy tailored choices from the top 40+ banks and lenders in Australia and help you choose and apply for the right loan solutions that satisfy your goals and needs.
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