The big question often facing many homeowners is whether or not to refinance their home loan or see out the one they have. It can be an attractive option when you begin researching all of the cheaper rates offered by other lenders but paying a cheaper rate does not always result in you saving a lot of money by changing to a new lender.
Given the right guidance however, there can be a lot of money to be saved in refinancing your home loan – whether you change lenders or simply get a better deal from your current mortgage provider. Healthy competition means, both banks and specialist lenders are becoming more competitive with their refinance options. Due to the fact that refinancing now represents a good amount of the mortgage market, there are many lenders wanting to gain the attention of borrowers who have are better financially aware. This has resulted in Australian borrowers receiving more competitive refinancing options.
If you’re interested in discussing your options to refinance your home loan – contact a mortgage professional today.
HOW DOES A REFINANCING LOAN WORK?
A refinancing loan works by essentially ending your old loan and starting a new one with a new interest rate and mortgage term. Sometimes that even involves a new balance. Whether you choose to receive a new mortgage from your existing bank or a new lender, is entirely up to you. It is highly recommended that you shop around for the best deal as it is not always with your current provider. It is not always in the bank’s best interest to refinance your loan so don’t be put off by their lack of enthusiasm. If in doubt about your situation and options, it is wise to enlist the help of a mortgage broker as they have the industry knowledge and expertise to find you the best available offer.
Regardless of the decision you make, the mortgage lender granting you a new mortgage, will pay off your existing mortgage with the new one. That is essentially what refinancing means – redoing your loan. Most homeowners decide to refinance their current mortgage for one of two reasons: to cash in the equity accumulated in their home, or to acquire lower interest rates.
When it comes to refinancing your home loan, the following options include:
- Variable rate refinancing: It is possible to refinance every six months but it’s important to note, this information is added to your credit dossier on every refinance. Regardless, it can be logical to refinance in the initial stages (two or three months) but depends solely on how much equity you’ve built up.
- Fixed interest rate refinancing: This can be complicated due to what it can cost you to break your contract and leave your loan early. Your mortgage broker can best advise you about your options.
- Low doc mortgage refinancing: This may be a good option for people who are self-employed and are unable to show the required evidence of income needed to be approved a standard home loan. Under this type of mortgage, you can still access up to 85% of your property’s value. If it is not possible to provide tax returns for your income, your accountant may provide a letter stating what they expect you to earn by the end of the financial year to help you get the loan. However, keep in mind that you will incur other conditions.
- Refinancing from a low to a full doc loan: If you’ve had a low document loan but have now built a substantial amount of financial evidence, you may be able to get a more competitive interest deal with another bank.
- Refinancing out of a bad credit loan: This allows you to change from a small lender to a major bank providing you have paid off more than 20% of the value of your property and all of your debts are paid off.
Contact your mortgage broker today to discuss the option best suited to your needs.
REFINANCING INTEREST RATES AND FEES
As there are costs involved in refinancing, it’s important to determine how much you will save from refinancing compared to how much it will cost you to do so. It’s worth noting that the amount it will cost you initially is relatively small when compared to your potential to save a huge amount of money in fees and interest repayments during the duration of the loan. The costs you may face during the refinancing process and those added to your new loan include:
- Exit fees: You may be required to pay exit fees to pay out your existing loan early. Generally, this only applies to the first three to five years during your loan agreement.
- Loan application fee: This will be charged when you apply for a new home loan.
- Borrowing costs: Your new lender may change a number of upfront fees when you refinance.
- Valuation fee: You may incur the cost of having the home appraised by a reputable property appraiser.
- Settlement fee: You may incur a fee from your bank to have your current home loan paid out.
- Break costs: You could be liable for what is referred to as a break cost from the mortgage provider who set up your existing loan. These is applicable when you want to refinance during the time in which you are in a fixed home loan contract.
- Ongoing fees: These apply depending on the type of mortgage you choose. They may be regular monthly account keeping fees, redraw fees or annual fees.
- Lenders Mortgage Insurance (LMI): If you still owe more than 80% of your purchase price, you will be charged a one-off fee.
- Stamp duty: By increasing your loan during your refinance, there is a chance you might need to pay stamp duty. This will depend on which state you live in. To have your mortgage registered on its title record in your state you will also be charge fees from the Land Titles Office.
It may be possible for you to come to an agreement regarding some of these mentioned fees and if possible, it is advisable to have a mortgage broker act work with you to negotiate with your bank.
In order to be eligible to refinance your home loan you ideally should have paid off more than 20% of your mortgage.
HOW TO APPLY FOR A REFINANCE
If you’re considering refinancing your loan, an experienced mortgage broker can help you to:
- Research and look for the best mortgage.
- Apply with the lender of your choice. When you use a mortgage broker, they will do all the researching to find the best mortgage that suits your current needs and will also submit your application.
Just as you had to do with your original loan, you’ll need to provide all the same documents such as your:
- Tax returns
- Bank statements
Once your application has been submitted, the bank or mortgage lender may ask to have your property valued again. From this point a discharge form will be submitted to the Land Titles Office in your state. This process enables your old loan account to be closed. Your new mortgage then pay the debt of your old one and you begin paying your new home loan.
ADVICE, TIPS AND CONSIDERATIONS
When thinking of refinancing your home loan it is always best to consider every aspect of your situation and whether it’s in your best interest to proceed. Refinancing could be a good option if:
- Your financial situation has undergone a major change
- Your lender’s rate is no longer competitive
- It’s the best time to switch to a fixed rate
- You’re seeking more money to pay for something major like a home renovation or an investment property
- You want to consolidate all of your debt.
You may want to hold off on refinancing if:
- There’s a chance you will sell your property soon
- The existing loan has high prepayment penalties
- Your credit rating has declined due to outstanding debts since applying for your previous loan, making it less likely lenders will look favourably on your application
- Your loan balance is low, and you don’t want to redraw on available equity
- You’ve don’t have a reliable source of income over the period of the loan
Another tip: It’s important to consider your motives. Do you want flexibility, a lower rate, lower fees, debt consolidation, or all of the above? It is not enough to only consider a lower interest rate. It important not to only focus on the competitive interest rates but the whole lifetime of the loan.
FREQUENTLY ASKED QUESTIONS
Can I refinance my mortgage?
Yes. In Australia, it is illegal for banks to force their customers to stay with them for the life of the loan. However, your bank may impose financial penalties such as exit fees for leaving.
Should I refinance my mortgage?
It is highly recommended that you review your home loan every two to three years – especially if your home loan is on a variable rate. There is a good chance of you negotiating a better rate and terms, either with your existing bank or with a new bank.
You may also want to review your mortgage when your financial circumstances change – for example, when you want to buy another property, or you have just had a baby.
When can I refinance my mortgage?
In theory, you can refinance the day after you take out your initial home loan. Realistically, it would be wise to wait at least a couple of years before refinancing unless your interest rate is significantly higher than other rates available in the market.
Banks tend to value new business far more than existing business and will offer lower rates to attract new customers.
If you’re on a variable rate, your current bank has probably increased the rate over time, or failed to pass on rate cuts, so the rate you’re on is no longer competitive.
What are my mortgage refinancing options?
With the competitive state of the market, there are literally hundreds of loan options available to you when you buy your house – refinancing included.
You should always investigate the market at the time you’re ready to refinance.
Will the new lender I refinance too pay my switching costs?
A number of lenders often offer rebates of up to $2,000 to new customers that refinance to them from another lender.
The rebates are usually more than sufficient to pay the switching costs.
Contact us to find out if any lenders are currently offering a refinance rebate.
What are the mortgage refinancing rates?
Mortgage refinancing rates vary from bank to bank, and rates and lending criteria can change from week to week. There are other factors that can impact rates including the type of loan, and your personal circumstances and the equity accumulated in your property. You should always review the market at the time you want to change your financial contracts.
CONTACT THE REFINANCING EXPERTS
The team at Mortgage World Australia, have been helping Australians with their home loans for years. We have both the experience and expertise to quickly assess your situation and determine which lenders can approve your application. We know which loans will save you the most money when it comes to refinancing your home loan.
Contact us today to discuss your options with one of our finance experts.