How to refinance a home loan

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Refinancing your home loan may be very rewarding. In the right circumstances, it could save you interest or time on your loan. It could also give you better features that save you money or otherwise make life easier for you.
Refinancing is when you get a new loan from your current or new lender that may improve your financial position. Improvement could be cheaper interest and fees, better repayment terms or better features.
At Westpac, a home loan refinance is different to a home loan increase, which gives you a way to borrow from the equity in your current loan.
By putting in the time and effort to understand why you are refinancing; your current financial situation; and the options available, there is a good chance you will make the right decision and reap the rewards. Here we explore 5 basic steps to help you successfully refinance your home.
There are 6 basic steps to successfully refinance a home loan:
Before you apply, it is important to understand why you are refinancing. Being clear on what you want to achieve will make it easier for you to ask the right questions of lenders and choose the outcome that suits you.
There are many reasons you may wish to refinance:
Taking a moment to reflect on the reason you want to refinance can be helpful in achieving the outcome you want.
Before you start looking for a new loan, it’s important to consider your current financial position and what a lender will want to know when you apply to refinance. This will help you decide if now is the right time to refinance and maybe which lender you will consider refinancing with.
Lenders are generally interested in three things, which some refer to as the three Ps.
The first is the purpose. What is the underlying reason you are borrowing the money? Are you looking for a better rate or extra features? Knowing this ahead of time allows the bank to suggest the appropriate features and product(s) and assess the relevant risks.
The second is yourself – the person. Are you someone who’s likely to pay back their loan, based on your past repayments habits? At this stage, you should access your credit history to check what is on it and whether it’s correct. You can get credit reports from Equifax, Illion and Experian, among others. To protect your data, you will need to prove your identity before they will release the information to you.
Your credit report contains many details about how you use credit products. It will include your:
If anything on the report is incorrect, you should arrange to have it corrected before seeking to refinance your home loan.
The third P is payback. There are 2 parts to this consideration: can you actually afford the repayments given your current financial situation? And should something go wrong, is it likely that the money could be recouped through sale of the property?
It’s important for both you and the lender to consider how your repayments may change after the refinance. Use a repayment calculator like Westpac’s Mortgage Repayment Calculator to get an idea of what your new repayments may be. If they stay the same or become less and you’ are comfortably making your repayments now, this should not be an issue and you can proceed with your research. If the repayments increase, then consider how you will pay the new amount out of your current budget.
Remember when you apply for the refinance, your lender will assess your ability to repay based on the information you give them and what is currently expected in the industry.
Lenders will generally only lend up to 80% of the value of a residential property (your home) in a primary location. If the property needs to be sold to repay the loan, the other 20% helps to cover the costs of selling the property and any reduction in the market value. The 80% is also known as the loan-to-value ratio or LVR.
You can calculate your own LVR, simply add your total secured loans, divide by current property value and multiply by 100.
Your total secured loan amount is how much you owe on your current loans (you can get this information in online banking or on your latest home loan statement), as well as the amount of any other loans you’re paying out or any increases to cover things like renovations.
You can check your approximate current property value with online tools such as Westpac’s Property Market Research service powered by CoreLogic. Remember this is an estimate – your lender may require an independent property valuation to be conducted at your cost when you refinance.
Here’s an example of how to calculate LVR: Abdul and Lucy have borrowings of $500,000 and a property valued at $625,000. $500,000 divided by $625,000 equals 0.80. Multiply 0.0 by 100 to arrive at an LVR of 80%.
If your LVR is 80% or higher, you may need Lenders Mortgage Insurance (LMI), which protects the lender if their loan isn’t repaid.. Depending on your reasons for refinancing, the cost of LMI may be more than any saving you make. You can obtain an estimate by using Westpac’s Stamp Duty and LMI Calculator – you should check with your lender if you need LMI before proceeding with an application.
Alternatively, you may be able to cover the shortfall in LVR with the equity in another property you own or you could investigate having a relative guarantee your loan backed by the equity in their assets. At Westpac, we call this a Home Loan Family Security Guarantee.
Now that you know why you want to refinance and you’ve calculated that it makes sense financially, it is time to start looking at your options. But before you start making enquiries, give your existing lender a call and explain what you are trying to do and why. They may surprise you and offer you a better deal. If they don’t, thank them for their time and seek out a better deal with another lender.
Before you start researching, here’s a list of terms you should understand:
Here are some other features that may be of interest to you and could save you money over the life of the loan:
You may have already looked around to get an understanding of what is on offer in the market before talking to your bank. If they did not come to the party, it’s now time to get into some serious research. Remember to compare all the factors that are relevant to why you are refinancing.
Check that your lender has a valid Australian Credit Licence. Use ASIC Connect's Professional Registers to check your credit provider has been licensed or you can phone ASIC's Infoline on 1300 300 630.
When comparing lenders, it is important to understand how all the interest, fees and charges work along with potential incentives for switching your home loan from one lender to another.
There are 3 main ways to compare how to refinance your home loan: go to lenders directly; use comparison websites; or use a broker.
Going to lenders directly involves obtaining going to each of the lenders you are interested in via internet, phone or in person.
Upside:
Downside:
Using a comparison website is very simple – you navigate to their URL and search for sections or keywords that relate to your reasons for refinancing. Most sites present a range of product features in tables ordered by lender, so you can easily compare similar features and fees before clicking through to the lenders that have the offers you want.
Many comparison websites get their information direct from the lenders who list on their site. The sites make money by charging the lenders fees for listings, clicks and commissions on completed sales, or a combination of these.
Upside:
Downside:
If the information is available on the comparison site, it’s a good idea to read up on how they get paid and the basis on which they sort the results.
This involves finding a mortgage broker you are confident will act in your interests, listen to your story and make impartial lender recommendations. A key benefit of using a broker is that they will complete your application and deal with the lenders on your behalf.
They are paid by the lenders via commissions based on the size and term of your loan. It is recommended you should interview 2 or 3 brokers before selecting who you will use.
Upside:
Downside:
Hopefully your research has revealed the right loan and terms to suit your needs and goals. It is now time to put in your application. This may be done online, via a broker, or by filling in the paper application form your lender provided you. It’s important to have all the information and supporting documentation the lender requires to assess and ultimately decide whether to approve your application.
This information will include:
Once the lender has these details, they will also ask your permission to conduct a credit check to ensure your financial records match those you’ve provided.
It’s a good idea to prepare any other information and verifying documents that may show you are a person of good standing and can comfortably repay the loan required. This is particularly important if it’s not obvious from the other information supplied that you can service the loan – if you’re self-employed, for example.
The new lender may also ask for information regarding other products or services you would like.
Once approved, your new lender should send you a new contract and mortgage documentation. As with any contract that involves large sums of money, you should seek independent legal advice before you sign. Even then, make sure you personally understand any terms conditions in the document.
Once you have signed the documents, your new lender will usually organise paying out your old lender and transferring the mortgage and any other accounts you are transferring.
Following settlement with your previous ender, you should receive a welcome kit from your new lender, setting out the interest rate and repayment terms again. Check this is correct and set up your accounts to start making your new repayments.
Written by the Davidson Institute powered by Westpac.
The information contained within this page is general in nature. It serves as a guide only and does not take into account your personal financial needs. Before you act on this information you should seek independent legal and financial advice. Approval subject to credit criteria. Fees, charges, terms and conditions apply.