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What is home loan refinancing?
If you’ve been repaying your mortgage for a while and no longer feel your home loan best suits your financial situation or budget, you may want to consider the benefits (and disadvantages) of refinancing.
Refinancing is a term used to describe the process of switching your home loan. This can involve staying with the same lender and switching internally from one home loan type to another (such as an owner-occupier loan to an investor loan) or switching from one lender to a different lender.
There are several reasons that a homeowner may want to consider refinancing, including:
- For a lower interest rate
- To pay fewer fees
- To add features and flexibility to their loan
- To access equity in the mortgage
- To take advantage of cashback offers
- To consolidate debt
While there can be a bit of research and paperwork involved, many homeowners consider the potential benefits they gain from refinancing, such as those listed above, to help make the pain worth the process.
When can you refinance your home loan?
You may refinance your home loan any time during your loan term, provided you have enough equity to qualify for another loan. However, remember to consider your reasons for refinancing, the costs you will incur and the potential benefits before deciding on when to refinance your home loan.
As a first time home buyer, you may also wonder how soon you can refinance a home loan after settlement. Theoretically, there isn’t any restriction on how soon you can refinance a loan. However, you may not benefit much from refinancing until you’ve been on a deal for at least 12 months or more.
Refinancing comes with several costs, which could outweigh any savings you hope to make if you refinance early in your loan. Still, you may want to consider this option if you’re getting a significantly lower rate or you’re not satisfied with your lender or the terms of your loan. Apart from costs, your personal situation is a crucial factor in deciding when you need to refinance.
In general, it’s recommended to revisit your home loan at least every couple of years to ensure your rate is competitive and the loan still fulfils your requirements.
What is the refinancing process?
It may be worth understanding the full process involved in home loan refinancing as it does not happen overnight.
| Step | What’s involved | Time |
| Identify your goals | Take some time to decide what exactly your refinancing goal is - it may be one or more of the reasons listed above. | A few hours. |
| Know your finances | You will be applying for a new home loan again, so you’ll want to ensure your finances are still in good condition. Consider cutting down on frivolous spending, paying off outstanding debts, or getting a copy of your credit history to ensure your credit score is where you think it is. | A few hours or however long is needed to boost your credit score. |
| Compare your options | Use comparison tools like tables and calculators to compare home loan options that may suit your refinancing goals. Filter down options and create a short list, then use a Repayment Calculator to see which new loan would best suit your budget. | A few hours to a few days. |
| Calculate switching costs | There may be some fees associated with refinancing, including application fees, or exit fees if you’re breaking a fixed rate term early. Make sure you’re aware of all these fees before applying. Then if you’re refinancing to a lower rate, determine your break-even point and calculate how many months of new mortgage repayments it will take to repay these switching costs. | An hour. |
| Application process | You know your refinancing goals, your finances are healthy, you’ve compared your home loan options and found your ideal new home loan. It may now be time to consider applying to refinance your home loan. | 15 – 60 minutes, depending on lender’s application. |
| Valuation | In some instances, your property may need to be re-valued. This should be organised by the new lender. | 2-3 business days post-application. |
| Approval | The lender will take time to review your application and consider if you are eligible for refinancing approval. The time taken may depend on the lender. | 2 -3 business days, up to 2 weeks. |
| Settlement | Your old lender will transfer your property title and mortgage debt to the new lender. At this stage you may be asked to pay switching costs. | 2 – 3 weeks. |
The benefits and risks of refinancing
Before you sign on the dotted line it’s worth understanding the potential advantages of refinancing, as well as the disadvantages, so you can make the most informed financial decision.
Arguably the biggest benefit of refinancing your mortgage is the potential savings you may earn if you switch to a lower rate or lower fee lender. For example, if your current lender is charging you a mortgage rate of 3.0%, and you find a lender willing to offer you 2.5% for your home loan, this difference of 50 basis points can amount to $103 a month or $1,236 in a year in savings on a 25-year, $400,000 mortgage.
And as home loan interest rates have been tipped to rise over the next few years, refinancing to a more affordable mortgage, or one that offers you helpful features like making extra repayments or an offset account, may help your household budget.
Further, you may be able to refinance to a larger loan amount to free up some equity in your home. These funds could be used for home renovation projects which may help to further boost your property’s value.
It’s worth keeping in mind that refinancing can take time and cost you in switching fees. However, as mentioned above you may be able to calculate a break-even point that the savings you gain from lower repayments cover these costs.
There are scenarios in which refinancing your home loan may not suit. If you only have a few years left on your mortgage, your new lender may extend your loan term another 20-30 years if you’re not careful. If your loan-to-value ratio (LVR) is still above 80%, you may not have the best leverage to gain one of the lowest rate home loans, as these are typically reserved for borrowers with LVRs of 80% or less.
Also, if your home loan is on a fixed rate, you may be charged a break fee to exit your fixed home loan term before it is up. These break fees can potentially cost thousands or even tens of thousands of dollars, depending on the lender, your loan size and the remaining fixed term. In this instance it may be worth waiting until the fixed term is almost over or expired to refinance.
Benefits:
- Save you in interest charges and fees
- Avoid sting of rising interest rate
- Access equity in the property
Risks:
- Can extend your loan term
- May not suit those with higher LVRs
- May pay a break fee if refinancing a fixed interest rate
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Product database updated 23 Nov, 2024
