Once you buy a home, it’s pretty easy to think that’s it – you have a loan, you’re making your repayments, and one day the home will be all yours, paid in full.

But just because you bought the home with a certain loan doesn’t mean you can’t change it. What? Yep, it’s called refinancing, and it can potentially save you thousands and have your loan working better for you.

So how do you refinance your home? The trick is to know what you’re looking for, why, and what’s available to you.

Let’s take a quick look at how refinancing works, what the benefits are and step you through the process.

What is refinancing?

Refinancing is the process of switching your existing home loan to a new one with either your current bank or a new lender. Moving the amount of money you still owe to a new loan can have a positive impact on your finances.

Interest rates are rising in Australia and many Aussies are turning to refinancing to try and keep their mortgage repayments down. A new loan has the potential for lower interest rates and fees, as well as better loan features and repayment terms that suit you.

Should I refinance my home loan

There are lots of reasons to refinance. If you’ve been looking into whether you should refinance your home, here’s a few to get you started:

• You may get a better rate and reduce repayments.
  
• You’re paying too much in fees and have found a better option.
  
• Your lender announced interest changes.
  
• You’ve reached a point where you can borrow at 80% LVR (Loan to Value Ratio), reducing the rate from the one you got when you were over 80% LVR.
  

Note:  LVR is the percentage of the total value of your home that you’ve borrowed. You can work this out by dividing your current loan amount by the price of your property. 

• You may get rewarded with loyalty points with another lender (such as Velocity Frequent Flyer Points).
  
• You want to access the equity you’ve built up in your home for renovations or an investment property purchase. If you’ve owned your home for a few years, it is likely that the value (and therefore equity) of your property has increased. 
  
• You’re looking to consolidate your other debts into your home loan. Streamlining your debt could potentially reduce the overall interest you’re paying on multiple debts. 
  
• Your fixed or interest only period might be expiring.
  
• You’re looking to change the loan structure or term in some way. This could be changing your repayment period or moving from a fixed to a variable rate home loan (or the other way around). 
  

What does it cost to refinance home loans?

Refinancing costs will vary depending on your individual circumstances, however some common refinance costs include:

• Discharge fees for your old loan
  
• Application fees for your new loan
  
• Valuation fees for your existing home
  
• Land registration fees to register a new mortgage to your new lender
  
• Lenders Mortgage Insurance (LMI) if you are borrowing at greater than 80% LVR after refinancing
  
• Ongoing fees
  
• Break cost fees if you have a fixed rate home loan.

Are there any reasons I shouldn’t refinance?

It might sound all win-win, but you should still pause for a moment to ask yourself if it’s the right time to refinance. It might not be worth the effort for a few simple reasons:

• If you have a fixed rate loan and you break the term, you will be subject to break costs. You’ll need to factor this into your budget planning.

• If you think the value of your home might have decreased since you purchased it, you may not get a better deal.

• You might be in a bit of a pickle credit-wise if you have not demonstrated strong credit behaviour (with late payments or issues with credit cards), leading to a risk you might be declined.

• If you’ve explored the options, and the costs appear to outweigh the benefits.

How to refinance a home loan

Refinancing your home loan usually involves the following steps:

1. Look at your options

First you’ll have to review what refinance options are available to you. If you are in a fixed rate term, you may not be able to refinance without incurring fees. You’ll also need to review your lender options – you may choose to remain with your existing lender, or switch to a new lender.

2. Compare home loans

When you start shopping around for a new home loan, here are few factors to consider:

• The loan term - a longer loan term could lower your repayment amount
  
• The interest rate - will you go with a fixed, variable or split interest rate?
  
• Repayment amount  - you can use a repayment calculator for this
  
• If there is a cashback offer - cost savings may be included in the deal
  
• Ongoing fees - what are the service or admin fees?
  
• Available features - can you attach an offset account or redraw facility to your loan?
  

3. Prepare your application

Once you apply for your chosen option, you may have to go through a loan process just like you did with your original loan, so that probably means a bit of paperwork. (If you refinance with the same lender, it’s usually quicker). 

Some of the information you’ll need to have handy includes:

• Personal details
  
• Family and employment situation
  
• Current earnings
  
• Current expense
  
• Assets (e.g. cars, property)
  
• Details about your current home loan.

4. Submit your application and sit tight!

The following will happen before you receive the result of your application:

1. Valuation – if applicable, your new lender will value your home
   
2. Credit score – your credit history will be checked to assess your risk
   
3. Income, assets, expenses and liabilities – you’ll need to share this info with the lender
   
4. Bank statements – proving your serviceability will be required
   
5. LVR – your loan to value ratio will be calculated
   
6. Rates and repayment schedules – will be set by the lender.

5.  Sign the contract of your new home loan

When the loan is approved, your lender will send you some documentation to go over with an independent legal specialist. Make sure that everyone is happy with the contract, including the interest rate and repayment terms. Once the documents are signed, you will begin the process of paying out your old lender and transferring your mortgage to your new loan. 

What difference does refinancing make?

If you’re wondering why you’d refinance your home when all you might gain is a fraction of a percent, don’t forget it all adds up over the life of the loan. Imagine you had a $500,000 remaining loan at 4.20% p.a. for a period of 25 years. If you refinanced to 3.80% p.a, you’d be saving less than half a per cent on the interest rate. But over the period of the loan, that works out to be over $30,000 in savings. Now that’s worth a little bit of paperwork.

Want to chat about how to refinance your home loan? Chat to us about how we can help you. 

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