If you find a home loan with a lower interest rate or fees, you may be interested to refinance your existing home loan.
In this guide, we’ll explain the ins and outs of home loan refinancing.
Refinancing is the process of taking out a new mortgage, either with your current lender or a new one, to repay an existing home loan. You may consider doing this if there’s been a change in your personal or financial circumstances, or simply because you want a better deal on your home loan. It’s common to change to a different lender when refinancing, although you can also refinance with the same one as well.
According to the Australian Bureau of Statistics (ABS), refinancing reached an all-time high in July 2021, hitting $17.2 billion in refinancing between different lenders.1 Most of this figure (about $11 billion worth) can be attributed to owner-occupiers seeking a better deal, with the remainder being done by investors.
According to the ABS’ Head of Finance and Wealth, Katherine Keenan, this was a 60% increase compared to a year prior, with this growth primarily driven by homeowners seeking out low interest rates (particularly among fixed loans) and enticing cashback deals.
Refinancing your home loan can be as simple as comparing your options then applying for a new loan. However, there are several factors to consider before pulling the plug on your current lender.
Before you decide to refinance your home loan, you should be aware of your financial situation. Perhaps your introductory or fixed interest rate is expiring, or you simply want to look for a better deal.
Below, we’ll explain the pros and cons of refinancing for you to keep in mind if you’re considering this option.
Some common benefits of refinancing include:
Some potential drawbacks of refinancing meanwhile are as follows:
First, figure out what you’re trying to achieve by refinancing. For example, you may want to:
Next, use our comprehensive home loan journey to compare a range of home loans available and filter the results, considering what features you’d like to have with your home loan that will satisfy your personal and financial needs and objectives.
You’ll need at least 5% equity in your home (i.e. the value of your home minus what you owe) in order to refinance, in most cases. If you have less than 20% equity or a loan-to-value ratio (LVR) greater than 80%, you may have to take out Lender’s Mortgage Insurance (LMI).
LMI can’t be transferred from one lender to another and you may have to pay this cost again to your new lender, which can be expensive. To avoid this, it’s sometimes better to wait until you have an LVR of 80% or less, or look to negotiate a better rate with your existing lender.
Generally, the process to refinance a home may include:
Find out the details of your home loan, including your current interest rate and mortgage repayments, and determine what changes could assist you in meeting your personal and financial goals.
Use our home loans comparison service to assess your options and look for a great-value product based on their rates, fees, features and more.
Our home loan consultants can answer some of the burning questions you might have. They may also be able to help you negotiate a better rate with your current lender or refinance to a different one.
Have your property valued, especially if you’ve completed renovations or your last valuation was more than 12 months ago.
Undergo a full application process, credit analysis, documentation and assessment with a new financial institution.
Have your financial institution’s required documents at the ready to support your application. Ensure you meet the lender’s eligibility criteria.
Receive unconditional approval from a lender to refinance.
When refinancing, your new lender will receive the title deeds to the home from your old lender and will pay them the money for the loan.
You may need a conveyancer to help you with this (see below).
You can usually refinance your mortgage at any time, though it’s favourable to have 20% equity before refinancing (less than an 80% LVR). If you’re on a fixed rate home loan, you may have to wait until your fixed term expires before doing so, to avoid expensive break fees.
However, there are several factors that you may want to consider before deciding to refinance, including:
It may not be necessary to hire a conveyancer when refinancing your home loan, especially if you’ve negotiated a better deal with your current lender since you’ll have already sorted out the settlement, title transfers and legal obligations related to the home buying process.
As the conveyancer’s role is to ensure the smooth purchase or sale of your home, their services will be redundant during the refinancing process. However, consider your own personal and financial situation and discuss any concerns with a professional.
The length of the refinancing process can depend on your lender. Some may get it done in as little as a week while others will take a bit longer, sometimes up to 60 days or more.
The process of refinancing your home loan can take as long as your initial home loan application, but is generally more likely to take longer if you’re switching to a different lender rather than staying with your existing one.
Refinancing will usually cost you. However, the costs may vary depending on your circumstances, and it’s possible to reduce how much you have to pay.
Some common costs may include:
Check the terms and conditions of your loan for a breakdown of the fees and charges, if any at all. If you aren’t careful, you might end up paying more than you were before.
In most cases, you need at least 5% equity to refinance. If you have that, you can usually refinance at any time if you have good credit.
However, it’s usually a good idea to refinance with at least 20% equity in your home to avoid taking out LMI. The better your credit, and the more equity you have in your home, the better the chance there is that you’ll get a better deal and be charged a lower interest rate.
While you don’t need a down payment to refinance, you’ll need at least 5% equity in your property. When refinancing, this equity takes the place of the deposit.
Yes, you can refinance a fixed rate loan. However, you should be wary of break fees. Break fees are charged as a penalty if you are to refinance or end the loan during the agreed fixed term, and can cost as much as tens of thousands of dollars in the most extreme cases.
Compare fixed and variable rate loans.
Stamp duty is a tax imposed by states and territories during the sale of a property and is therefore not a home loan cost, but rather a home buying cost. Since refinancing involves switching home loans, you will most likely not have to pay stamp duty.
A possible exception to this is if the title of the property or ownership details are changing. If the name of the borrower changes, then stamp duty may apply. You might also have to pay stamp duty if you increase the size of your loan, on the additional amount borrowed. Mortgage registration fees can also apply.
Speak to a certified home loan specialist, a mortgage broker, or visit your state’s relevant housing authority for more information on stamp duty.
Unless you’re a serial refinancer, refinancing your home won’t permanently affect your credit score. A formal credit enquiry is required when refinancing, and it will stay on your credit history for five years.
However, you can build up your credit score easily as long as you continue to make regular on time repayments to your new lender. If you’re refinancing to consolidate your debts, this can also have a positive impact on your credit score.
A one-off rejection for a home loan application might not hurt your credit score, but multiple failed applications probably will.
Refinancing with your current lender may not necessarily give you a ‘better’ interest rate, but it might be easier. Your current lender has all your information, so the process will probably be much simpler than if you switched to a different financial institution.
However, a different lender might be offering something better, and there are hundreds of home loan products on the market now. Plus, nowadays it can be quick and painless to refinance to another lender.
If you’re ready to refinance your home loan, or you just want to see what options are available, use our home loan comparison journey. You can customise your search from a range of different lenders, filtering the products you see by your needs based on interest rates, fees, repayments, features and much, much more.
The traditional way of refinancing can be painful at times, but our service aims to make it as simple and painless for you as possible.
So, what are you waiting for? Compare home loan products with Compare the Market today and get refinancing!
1Australian Bureau of Statistics Lending Indicators, September 2021.