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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.

What is 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.

Refinancing statistics Australia

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.

How does refinancing a home loan work?

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.

Pros of refinancing

Some common benefits of refinancing include:

  • You may get a better interest rate. Lenders often have enticing deals for new customers, and the average interest rate for new home loan customers is generally lower than the average rate for existing ones.2
  • You could take advantage of cashback offers. Lenders may also offer a ‘cashback’ deal in exchange for your home loan account, which can give you a bit of a cash boost in the short term.
  • Your introductory or fixed rate period on your loan is expiring. Fixed and introductory loans often revert to a standard variable interest rate, which is often much higher than the fixed rate, as well as other rates you could get.
  • You can increase or decrease your home loan repayments or switch to a shorter or longer loan term. A longer loan term can result in lower ongoing repayments but a greater sum owed in total, while a shorter loan term can save you money in interest overall.
  • You could access better loan features, such as an offset account, redraw facility, split loan, or enable making extra repayments, and so on.
  • You can access the equity in your home. Home equity (how much of the property you actually own) can be used to pay for things like renovations, a car, a holiday or even a deposit on a second home.

Cons of refinancing

Some potential drawbacks of refinancing meanwhile are as follows:

  • You may end up with a higher interest rate. If you aren’t careful, you may end up switching to a loan with a lower introductory rate than your current home loan, but it may revert to a much higher interest rate
  • You could pay high break costs. If you switch from a fixed rate loan before the fixed term is up, you can find yourself thousands of dollars out of pocket, depending on the fixed term left and the size of your loan.
  • You may pay higher fees. Annual fees, upfront switching fees, and package fees (if applicable), as well as adding features to your loan, such as having an Offset account or redraw, can all make a home loan more expensive.
  • You might have to pay LMI again. Lenders Mortgage Insurance (LMI) can be very expensive, and if you don’t have a loan-to-value (LVR) ratio of at least 80% when refinancing, you might have to pay it again.

How to refinance a home loan

First, figure out what you’re trying to achieve by refinancing. For example, you may want to:

  • Take advantage of cheaper interest rates or fees
  • Take advantage of more flexible features
  • Fund a second home purchase or undertake a renovation with your equity
  • Consolidate other debts into a mortgage, such as debt from personal loans or credit card

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.

What’s needed to refinance a home?

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:

  1. Research

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.

  1. Compare

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.

  1. Speak to an expert

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.

  1. Valuation

Have your property valued, especially if you’ve completed renovations or your last valuation was more than 12 months ago.

  1. Application

Undergo a full application process, credit analysis, documentation and assessment with a new financial institution.

  1. Legal documents

Have your financial institution’s required documents at the ready to support your application. Ensure you meet the lender’s eligibility criteria.

  1. Approval

Receive unconditional approval from a lender to refinance.

  1. Settlement

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).

When can you refinance a home loan?

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:

  • Your existing home loan. If you want to refinance, check with your current lender to see if you can negotiate a cheaper interest rate. This is also something a Mortgage Broker can assist you with. This may save you time and money as you won’t have to move to a new lender and undergo their full application process.
  • The associated costs of refinancing your home loan. Check if you’ll need to pay any break penalties, exit fees, legal fees and investigate what the fees are likely to be with the new lender, e.g. application fees.
  • Compare the costs. Consider if these costs (including your old loan’s break fees (if applicable) and the new loan’s administrative fees and additional costs) outweigh any perceived benefits of refinancing. For example, it might be worth paying a break fee if you can save thousands of dollars over the life of the loan through lower interest rates, fees, and more regular repayments, like being able to make loan repayments on a weekly or fortnight basis instead of monthly.
  • Your current LVR and whether you require LMI. You can’t transfer LMI to another lender as this insurance policy is designed to cover your lender only which makes it non-transferable to another.
  • Speaking to a broker. A broker may be able to negotiate a more favourable interest rate or deal with your current lender or help you find a better home loan with a new one.

A couple refinancing home loan

Frequently asked questions

Do I need a conveyancer or lawyer to refinance?

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.

How long does it take to refinance a home loan?

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.

How much does it cost to refinance a home loan?

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:

  • Discharge fee or settlement fee). An administration fee that covers your current lender’s legal costs.
  • Application fees. An upfront fee for processing and assessing a new loan application.
  • Valuation fee. A fee that covers the costs of valuing your property.
  • Mortgage registration fee. The cost for registering the lender’s mortgage on your property’s title.
  • Lenders Mortgage Insurance (LMI). This is generally only applicable for loans with an LVR greater than 80%. LMI protects your lender, not you, if you can’t afford to make your repayments.
  • Ongoing fees. Regular administration fees that can be annual or monthly.
  • Break or exit fees. A penalty fee that may be charged by your current lender for terminating a fixed rate loan contract early (i.e. prior to the end of the agreed term).
  • Additional costs. These may include costs for title searches, title insurance, surveys, taxes, credit report charges and more.

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.

How much equity do you need to refinance?

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.

Do I need a deposit to refinance my home loan?

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.

Can you refinance a fixed home loan?

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. 

Do I need to pay stamp duty again when refinancing?

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 costSince 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.

Does refinancing impact your credit score?

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.

Is it better to refinance with your current lender?

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.

Ready to refinance your home?

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!

Sources

1Australian Bureau of Statistics Lending Indicators, September 2021.

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