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How to refinance a home loan in six steps
Experts say that the right time to refinance depends on one basic principle: when the difference between your current interest rate and the average market rate is close to 1%.
However, there are a range of reasons why Australians could consider refinancing:
- Securing a lower interest rate
- Paying fewer mortgage fees
- Decreasing monthly mortgage repayments
- Rolling several existing debts into one package
- Accessing equity for a large-scale purchase
- Switching to a different lender
One of the biggest reasons that homeowners are considering refinancing in 2023 is that a record number will be leaving their ultra-low fixed rates and reverting to higher standard variable rates. These revert rates are typically much higher, meaning that your repayments could be higher.
If this sounds like you, then you may want to consider refinancing. This means taking your mortgage debt and moving it to a different lender with a more competitive interest rate. In turn, this means your repayments could be lower, as you’d pay less interest.
Refinancing is a strategy that could save you thousands - potentially hundreds of thousands over the life of the loan, depending on your loan size and loan term. So, it’s often worthwhile investigating if refinancing may suit your financial situation, instead of being complacent about the current rate you are on.
1. Negotiate a better home loan rate
If your mortgage repayments are becoming overwhelming for your budget, it’s worthwhile taking the simple option first and asking your lender for a rate cut.
Generally speaking, lenders reserve their most competitive interest rates for new customers to entice them to sign up. Find out what these rates are, pick up the phone, and request the lender match this rate. If you’re not sure what to say, follow our handy guide on negotiating your home loan rate.
From personal experience, I reached out to my lender to see if there was anything more competitive they could offer me and they did indeed reduce my rate. Of course, not all lenders will say yes. But it’s often worth asking the question, especially if you let your institution know that you are looking to refinance.
2. Compare rates to get a feel for the market
If your current lender hasn’t reduced your rate, or it did and you’re still unhappy with it, now is the time to consider looking for a better deal. Using a comparison table allows you to look at multiple loan products and compare them all in one place.
This lets you get a feel for how your current rate compares to others, and what rates are currently available. You’ll never know what competitive home loan options are available until you start shopping around. It’s important to not just rely on the Big Four Banks, but to check out smaller lenders, digital banks, credit unions and other digital loan providers. Smaller lenders may be able to offer lower rates and fees on average to remain competitive.
A comparison table can come in handy here. Instead of visiting multiple websites, you can see a relatively comprehensive list all in one place. Compare apples with apples by filtering down a range of loan options and viewing how they stack up against each other.
- Free property report - It is likely your new lender will perform a property valuation when you refinance. It may be worthwhile doing this yourself beforehand to ensure your equity is in a strong position to refinance. Get a free property report now with RateCity’s helpful Property Report Tool.
- Free credit scores - You may be more likely to gain approval for lower-rate home loans if your credit score is in an ‘Excellent’ category. Use RateCity’s Credit Score App to easily see your credit scores with Experian and Equifax for free.
- Refinance Calculator - RateCity’s Refinance Home Loan Calculator can provide an indication of how different home loan options could benefit you, including how different interest rates will affect the overall cost of your loan and how you can pay off your loan faster.
3. Understand your equity and how this affects what you can apply for
Equity is the difference between your property’s market price and the outstanding balance on the home loan. It is essentially how much of the home you own outright.
Let’s say your home is valued at $1,000,000 and your current mortgage is $600,000. This means that you own $400,000 of your property outright. You have 40% equity and the other 60% is mortgaged.
This is important because there are loans out there that require a particular amount of equity in order for you to be eligible, also known as ‘available equity’. In fact, it is quite common for some loan products to require at least 20% equity in order to facilitate a refinance.
That’s not to say that you can’t refinance if you have less than 20% in equity. But it does mean the pool of products available to you will likely be smaller and you may have to take out lenders mortgage insurance in order to qualify.
4. Choosing your new loan - remember to look for cashback deals
Once you know what a competitive rate looks like and how much equity you have, you can start looking for products that will suit your particular circumstances. You can enter your numbers and requirements into the filters of a comparison table in order to see a selection of the products that might meet your needs.
There are a few key loan features that may or may not be beneficial to you. Depending on your circumstances, you may want to look out for loan products that include the following:
- Fixed interest rate or a variable interest rate
- Offset account - or multiple offset accounts
- Redraw facilities
- An introductory rate
- Portability
- Similar loan term - avoid extending your loan term out to 25-30 years again.
Additionally, at this stage it may also be worth looking at cashback deals. Sometimes lenders will offer you an instant cashback offer in order to secure your business for now and into the future.
Cashback deals range between $2,000 to $10,000, depending on the lender and the value of your property. These sign-up perks may help to cover the cost of switching, so it is certainly worth exploring. Just make sure to compare factors like the interest rate and fees associated, as there is more to a home loan than a sign-up deal.
5. Have your documents prepared and get ready to apply
Once you’ve found the mortgage product that looks right for you, the next step is to apply.
This often feels like the most daunting step. But what you might not realise is that most institutions have customer service representatives that can walk you through the whole process.
In fact, some mortgage providers - particularly online lenders - could even assess you on credit score and pre-approve you much faster than you’d think.
It’s a good idea to have some documents on hand before you start. This could include:
- Bank statements and payslips to serve as a proof of income and monthly expenditure.
- Assets and things of value that you own - this could be properties, cars and more.
- Existing debts and lines of credit - have some recent statements available. Your loan provider may want to know how many lines of credit you have open.
Other than that, the actual application process should be smooth, with a step-by-step form. You can complete most forms online or some institutions may allow you to apply in person at a branch. In particular, digital home loan providers have vastly simplified the process. The actual application can often be as easy as answering a few questions and clicking on a few buttons.
After your application is sent, your lender may:
- Request to have your property valued by a professional. This cost is usually covered by the lender. You may need to arrange for a valuer to view your home. Depending on the size of your home, this could take anywhere from 10 minutes to one hour.
- Ask you to answer some follow-up questions about your income or expenses.
- Require more documents like bills or credit card statements.
That's it. Your lender or broker should typically handle the rest.
If you have been approved, you can receive your new loan documents to sign in just a few business days. You may want to consult a legal professional to ensure you understand everything before you sign on the dotted line.
After you have signed, your new lender will typically organise the payout of your old loan and then supply you the details of your new accounts. Many lenders will send you out a welcome kit to help you get acquainted with your new loan, its features and accounts.
6. If the process is overwhelming, find a broker instead
As simple as the refinancing process is these days, some people are too time poor to compare rates. Others may simply feel too overwhelmed by the numbers and may prefer expert advice. This is where a mortgage broker could be helpful.
A mortgage broker’s job is to help you find the best mortgage for you. They compare rates and talk to the banks, all on your behalf. Additionally, they walk you through the application process. All you need to do is provide documents when asked.
In Australia, mortgage brokers are legally required to present you with the best possible offers for your needs - not just the offers that will land them the biggest commissions. You shouldn’t need to be concerned about a bias that could have you paying more. Also, mortgage brokers take their fees from the banks - not from you. So, you have access to their services generally for free.
Be aware that most mortgage brokers will not be comparing across the whole market. Typically, brokers have access to an expansive portfolio of loans they can choose for their clients. But this portfolio will likely not include every single loan product. Meaning, there could potentially be a better deal for you beyond what a mortgage broker can offer you if you shop around yourself.
Don’t:
- Get greedy about the amount of money you can borrow. Over-extending yourself with repayments may only lead to the need to refinance again down the track.
- Be sucked in by introductory or honeymoon rates, which often revert to unmanageably higher rates after the first year.
- Forget about Lender’s Mortgage Insurance (LMI), as you will need to pay this insurance again if your property value has fallen and your loan-to-value ratio (LVR) is higher than 80%.
Do:
- Sit down and work out the total cost of refinancing. This includes discharge, establishment, legal and stamp duty fees if you are moving on to a new property.
- Compare your home loan options carefully before automatically signing on to a new loan with your current lender. Current competition in the market means you have leverage when it comes to negotiating a better deal.
- Make sure your new bank or lender provides you with written confirmation of the interest rate agreed upon during your application process.
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Product database updated 22 Nov, 2024
