Everyone knows that it pays to shop around when it comes to home loans, and this still holds true even once you’ve got one in place. If you find a home loan that you think could offer better value than your current one – whether due to a lower interest rate, lower fees or a richer feature offering – you may want to consider refinancing your home loan.
But how does refinancing work? How much does it cost, and can anyone with a home loan refinance? Read on to learn about the ins and outs of home loan refinancing.
Selling Houses Australia host, Andrew Winter, gives a brief overview of how refinancing works, and what the refinancing process looks like.
Refinancing is the process of replacing your existing home loan with another, ostensibly ‘better’ home loan from either your current lender or a different financial institution.
To properly explain refinancing, let’s quickly cover the difference between your home loan and your mortgage.
Your mortgage is the contractual agreement you have with the lender who gave you your home loan, which:
Your home loan is the loan you took out in order to purchase your property and linked to your mortgage. It’s a financial product just like a credit card or a personal loan.
If you refinance with the same lender, you’ll have a new loan but keep your existing mortgage, albeit with some potential modifications based on the nitty gritty of your new home loan. Whereas if you refinance with a different lender (which is known as external refinancing), you’ll have a new home loan and a new mortgage with a new lender.
According to the Australian Bureau of Statistics (ABS), the seasonally adjusted value of external refinancing for total housing in May 2022 hit $17.1 billion, representing a month-on-month increase of 3.1% and a year-on-year increase of 16.6%.1
For owner-occupiers, the total value of external refinancing reached $11.5 billion; for investors, it was $5.5 billion.
The process of refinancing your home loan will vary depending on whether you’re refinancing internally (with your current lender) or externally (with a new lender).
If you’re refinancing internally, the process may be simple as your lender already has all your information and documentation in the one place. Additionally, an internal refinance can be more akin to a renegotiation of your home loan rather than a full-blown product switch, and it’s generally simpler to deal with a familiar lender than one you’ve never dealt with before. You may also incur fewer or smaller fees by refinancing internally, but this will vary from lender to lender and from loan to loan.
External refinancing, on the other hand, will generally be a more complex affair, as it will involve dealing with two lenders, one of whom you likely don’t have a relationship with yet. Porting your mortgage from one lender to another can be a lengthier process, and you may incur more or larger fees for the privilege. These can potentially include discharge fees, break costs (if you’re on a fixed rate home loan) and other lender charges. That being said, at any given time you may see certain lenders trying to entice new customers by offering cashback when you refinance.
Whichever method of refinancing you decide to pursue, you should assess all your options and make sure you find a home loan that offers you better value than your current one.
Some common benefits of refinancing can include:
Some potential drawbacks of refinancing may be:
Generally, the process to refinance a home will involve the following steps:
Find out the details of your home loan, including your current interest rate and mortgage repayments, as well as your potential break costs, and determine what changes could assist you in meeting your personal and financial goals.
Use our home loans comparison tool to assess your options and look for a great-value product based on its rates, fees, features and more.
Our home loan consultants can answer some of the burning questions you might have about refinancing. They may also be able to help you negotiate a better rate with your existing lender or refinance to a different one.
Have your property evaluated, especially if you’ve completed renovations or your last valuation was more than 12 months ago. You may find that your property value has changed noticeably.
Undergo a full application process, credit analysis, documentation and assessment with either your current lender or a new financial institution. Even though you’re a card-carrying homeowner now, you’ll still be assessed against the same stringent lending criteria as everyone else.
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 replace the old lender on the title deeds to the home and payout the old lender’s loan amount with the new loan funds.
You can usually refinance your mortgage at any time, though it’s generally a good idea to have at least 20% equity before refinancing (and subsequently an LVR smaller than 80%). If you’re on a fixed rate home loan, you may want to wait until your fixed term expires before doing so in order to avoid expensive break fees.
However, there are several other factors that you may want to consider before deciding to refinance, including:
No, you will not need the assistance of a conveyancer or lawyer in order to refinance, as they typically only get involved with sales contracts and the settlement process. If you’re simply changing home loan contracts, there’ll be no need for a lawyer or conveyancer.
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 internally may only take around the same time as your initial home loan application, but if you’re refinancing externally with a different lender, that may take longer to be processed and approved.
Refinancing will never be free, but the costs will vary depending on the specificities of your financial situation and what your refinance looks like.
Some common costs may include:
Check the terms and conditions of your home loan for a breakdown of the fees and charges that may be applicable.
When it comes to refinancing, you won’t need a traditional deposit but what you will need is equity in your current home – equity meaning the portion of your home you ‘own’ based on how much you’ve made in home loan principal repayments.
It’s usually a good idea to refinance with at least 20% equity in your home to avoid having to pay LMI. The better your credit and the more equity you have in your home, the better the chance there is that you’ll get an improved deal and be charged a lower interest rate. If you have less than 20% equity, you will most likely need to pay LMI again as this isn’t transferrable between lenders.
Yes, you can refinance a fixed rate home loan. However, you should be wary of break fees, which are charged if you refinance or end the loan during the stipulated fixed rate period. These can cost as much as tens of thousands of dollars in the most extreme cases.
Stamp duty is a type of 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 generally not have to pay stamp duty when refinancing.
A possible exception to this is if the title of the property or ownership details are changing. If the name of the borrower changes, stamp duty may then apply. Mortgage registration fees can also apply.
Speak to a certified home loan specialist, a mortgage broker or your state’s relevant revenue office 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 if you continue to make regular and on-time home loan repayments to your new lender. If you’re refinancing to consolidate your debts, this can also have a positive impact on your credit score.
It’s important to note that a one-off rejection for a home loan refinancing application might not hurt your credit score, but multiple failed applications almost certainly will. So, make sure you’re ready to apply.
Refinancing with your current lender may not necessarily give you a better interest rate, but it may be quicker and easier than refinancing externally. 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. Plus, nowadays it can be quick and painless to refinance with another lender, so don’t rule out the idea of refinancing externally just because it might not be quite as quick.
So, what are you waiting for? Compare home loan products with Compare the Market today and get refinancing!
