If you find a home loan with a lower interest rate or fees, you may feel tempted to refinance your existing home loan. Here, we’ll explain all the ins and outs of what it takes.
Refinancing is the process of taking out a new mortgage to repay an existing loan: often because there has been a change in your personal or financial situation, or simply because you want a better deal on your home loan. While this can be with the same lender, it is also common to change to a different provider.
Some common reasons why you’d want to refinance your home loan may include:
Refinancing your home can be as simple as comparing your home loan 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, find out how it can benefit your financial situation. Perhaps your introductory or fixed rate is expiring, or you simply want to look for a better deal.
First, you’ll want to figure out what you’re trying to achieve. For example, you may want to take advantage of cheaper interest rates. Then use our home loans comparison service to compare the variety of loans available with results tailored to your needs.
You’ll need at least five per cent equity in your home (i.e. the value of your home minus what you owe) However, if you have less than 20 per cent equity (or greater than an 80 per cent Loan-to-Value Ratio (LVR)) then you may have to take out Lender’s Mortgage Insurance (LMI).
LMI can’t be transferred from one lender to another and so you may have to pay this cost again to your new lender, which can be expensive. To avoid this, it’s best to wait until you have a Loan-to-Value Ratio less than 80 percent or look to negotiate a better rate with your existing lender.
Besides that, you may need to do some research to ensure that refinancing is the best option for your situation. Generally, the process to refinance a home may include:
Research
Find out the details of your current loan and determine what changes could assist you in meeting your financial goals.
Compare
Use a home loans comparison service to look for a great-value product that matches your needs.
Speak to an expert
Our Home Loan Consultants can put you in touch with a Mortgage Broker who may be able to negotiate a better rate with your current lender or help you with your home loan refinance.
Valuation
Have your property valued (if the last valuation is over 12 months old), especially if you’ve completed renovations.
Application
Undergo a full application process, credit analysis, documentation and assessment with a new financial institution.
Legal documents
Complete your financial institution’s legal and mortgage documents.
Approval
Receive unconditional approval for the refinance.
Settlement
Transfer the ownership of the property to your name.
No, it’s usually unnecessary to hire a conveyancer when refinancing your own home loan since you’ll have already sorted out the settlement, title transfers and legal obligations at the time of initial purchase, related to the process of buying a home.
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, you may wish to hire a lawyer to represent your interests in the refinancing process with the lender’s lawyers.
You can refinance your mortgage at any time, though it’s favourable to have 20 percent equity before refinancing (less than an 80 percent loan-to-value ratio) and, if you have a fixed interest rate loan, to not have a long fixed term remaining. However, there are several factors that you may want to consider before deciding to refinance, including:
The process of refinancing your home loan can take as long as the initial loan you applied for – up to 60 days or more, especially if you’re refinancing to a different institution. The only difference is that you won’t be exchanging a purchase or sale contract.
Refinancing will cost you money. However, the costs may vary depending on your circumstances. Some common costs may include:
You need at least five per cent equity to refinance. If you have that, you can usually refinance at any time if you have good credit. However, it’s a good idea to refinance with at least 20% equity in your home.
The better your credit and the more equity you have, the less chance there is that they’ll charge you a higher interest rate or make you take out LMI.
While you don’t need a down payment to refinance, you’ll need at least five per cent equity in your property.
Yes, you can refinance a fixed mortgage rate, however, you should be wary of termination break fees, which can be especially expensive if you refinance early in the fixed interest loan term.
Closing costs are associated with the refinance or loan settlement. You may not be able to avoid this cost. However, you can look for a better deal by comparing loans and by negotiating these fees with your new lender. It always pays to compare!
Unless you’re a serial refinancer, refinancing your home won’t permanently affect your credit score. Refinancing may stay on your credit history for about two years, but it may only affect your credit score for a short period (e.g., 12 months) as you can rebuild your score by staying on top of your repayments.
Whenever a formal credit enquiry is submitted, your credit score can be affected. If you’re closing an account (i.e. your current loan) to which you’ve been making consistent and timely repayments to, your score may dip because you’re closing something that’s had a positive effect on your score.
However, you can build up your credit score easily as long as you continue making consistent and timely repayments to your new lender. If you’re refinancing to consolidate your debts, this can also have a positive impact on your credit score.
If your application is denied for any reason, it won’t affect your score, but it may show up in your history on your credit report.
Refinancing with your current lender may not necessarily have a ‘better’ interest rate, but it certainly will be easier and cheaper. Your current lender has all your information, so the process will be much simpler than if you switched to a different financial institution.
Keep in mind that regardless of who you go with, you’ll still have a formal credit enquiry on your credit record, which will impact your score.
Are you thinking of refinancing your home loan? Consider using our online home loan comparison service to start your search for a new loan! Our service includes products from over 40 lenders and makes it easy to compare the interest rate, comparison rate, repayments, introductory offers, fees, and other features (including extra payment availability, construction and offsets).
You can customise your search to meet your specific financial needs and circumstances, so you’ll know you’re getting a personalised result. If you’d like to speak to a home loan expert over the phone, call 1800 737 434.
So, what are you waiting for, compare home loan products today!
