What is refinancing?
How to refinance a home loan
Selling Houses Australia host, Andrew Winter, gives a brief overview of how refinancing works, and what the refinancing process looks like.
Andrew Winter
Home Loans
Video Transcript
Hi, I’m Andrew Winter, host of Selling Houses Australia.
Are you unhappy with your current home loan? Maybe the interest rate isn’t a bargain anymore,
or you’d like to change to a different kind of home loan.
Well the good news is that it may be possible for you to change from
one home loan to another – it can even be with a completely different lender!
This process is called refinancing, and it can be an invaluable strategy for making
sure your home loan matches your financial priorities, instead of deciding them for you.
Refinancing is basically taking your home loan and giving it a different set of rules to play by.
You might be looking for a lower rate, more attractive fees, or a different kind of home loan altogether.
Whatever you are looking for in a home loan, you’ll have to find it first, and then apply
to refinance to that particular home loan. Unfortunately, depending on your lender and the
type of refinancing you’re looking to do, you may incur a range of costs including discharge fees,
application fees, and potentially break fees. So, what do the different types of refinancing
look like? Well, you can refinance internally (with your current lender)
or externally (with a different lender). Before you decide the grass is greener elsewhere,
check with your current lender to see what they might have to offer.
But if they can’t offer you a better rate or you are unhappy with their services,
you may want to start looking further afield. It’s worth mentioning that the process of
refinancing can be quite complex – it sometimes feels a bit like applying for a home loan all over
again, as the lender will need to re-assess your finances to make sure you can repay the new debt.
And anyone who’s applied for a home loan before can tell you finding the right one
is hard work; after all, you’ll have the whole market at your fingertips!
But who better to help you compare the market than well, Compare the Market!
You can compare based on rates, fees, features and more, and their on-call home loan specialists
can help you with any questions you might have, as well as guide you through the application process
if you’ve found the right home loan for you. So go on and get comparing!
Refinancing explained
What is refinancing?
Refinancing is the process of changing home loan products, usually to get a lower interest rate and, subsequently, smaller home loan repayments. Generally, the same security used for the current loan is used for the new home loan.
While you can technically refinance with your existing lender, this will typically be a home loan re-negotiation rather than a full refinance. It’s more common to refinance a home loan with a different provider, regardless of your financial situation or reasons for wanting to refinance.
How does refinancing work?
The first step when looking to refinance is checking what kinds of fees your current lender might charge you for switching home loans. Depending on your current lender and home loan type, you may have to pay a break fee or other closing costs in order to refinance.
Once you’ve figured out what your refinancing costs might look like, you’ll want to compare your home loan options to determine which types of loans could suit you. Once you’ve found one you like, you can apply to refinance your existing loan with the new lender in question.
The process of refinancing will require formal approval from your new lender. If they do approve your application, they’ll then send a discharge form to your old lender to notify them of your refinance and tell them which lender they should release your current mortgage to. You may also pay an application fee relating to your new mortgage.
What are the benefits of refinancing?
Depending on your current home loan and financial circumstances, refinancing could potentially help you:
- Secure a lower rate on your home loan, and subsequently lower monthly repayments over the loan term
- Consolidating other, higher-interest debts into your home loan amount
- Access equity you’ve built up in your property
- Benefit from different home loan features.
A lower interest rate
Refinancing can help you make sure your home loan is as suitable for you as possible, as well as reducing the size of your home loan repayments by switching to a lower interest rate.
For example, if you took out a home loan with a deposit of less than 20% or you had an unfavourable credit history, you might’ve been saddled with a higher interest rate when you first took out the loan. If you’ve been meeting your regular home loan repayments since then, you could potentially refinance and end up on a more favourable interest rate, which could help you save on your total interest costs over the life of the loan.
Debt consolidation
Home loan interest rates are typically much lower than those on credit cards and personal loans/car loans, so rolling those sorts of debts into your home loan (if possible) could potentially help you save on your overall interest expenses. Having one loan to manage instead of several could also make managing your finances just that little bit easier to boot.
Accessing your equity
When refinancing, depending on your existing home equity and credit history, you may have the option to borrow additional funds and increase the size of your home loan. You’ll also need to have the required borrowing power, which will largely be determined by current interest rates and your disposable income.
These additional funds could be used to pay other debts or for home improvements and/or renovations to your property.
More home loan features
Prospective refinancers might also be looking for a different type of home loan in order to access a home loan feature their current home loan doesn’t offer, such as an offset account or a redraw facility.
These sorts of features aren’t typically available on fixed rate home loans, so borrowers wanting to access them may choose to refinance to a variable rate home loan.
Meet our home loans expert, Stephen Zeller
Stephen has more than 30 years of experience in the financial services industry and holds a Certificate IV in Finance and Mortgage Broking. He’s also a member of both the Australian and New Zealand Institute of Insurance and Finance (ANZIIF) and the Mortgage and Finance Association of Australia (MFAA).
Stephen leads our team of Mortgage Brokers, and reviews and contributes to Compare the Market’s banking-related content to ensure it’s as helpful and empowering as possible for our readers.