1. The benefits of refinancing your home loan
It’s worth putting some time and effort into thinking about why you want to refinance – and what potential benefits you hope to get out of it.
Refinancing your home loan could help you:
- Get a lower interest rate or reduced fees
- Borrow more for a renovation, investments, or a new car
- Reduce your repayments
- Consolidate several loans
Once you’re clear on what you want to achieve, it’s much easier for you to ask the right questions of lenders and choose the loan that best suits your needs.
Doing your homework before you apply could help you make a decision that serves you down the track and helps you reap the rewards.
2. Understanding your current financial situation
Before you start looking for a new home loan, it’s good to check on your current financial position and the things a lender may want to know when you apply. This may help you decide if now’s the right time to refinance – and maybe which lender is better for you.
What lenders look for – the three ‘Ps’ of lending
Lenders are generally interested in three things, sometimes known as the ‘three Ps’.
What is the general reason you want to refinance? Are you looking for a better rate or extra features? This information lets the bank suggest the right kind of features and product(s) you’re looking for – and assess the relevant risks.
How much can you borrow? Loan to Value (LVR) ratio
Lenders will generally only lend up to 80% of the value of your home. This is known as the loan-to-value ratio or LVR. If the property had to be sold to repay the loan (a ‘last resort’ for Westpac) the other 20% helps cover the costs of selling and any reduction in the market value.
To find out your LVR, add your total secured loans, divide by current property value and multiply by 100.
Insuring your loan
If your LVR is 80% or higher, you may need to pay for Lenders Mortgage Insurance (LMI). This protects the lender if their loan isn’t repaid.
3. Compare home loan options
Now that you know why you want to refinance, it’s time to start looking at your options.
Before you decide to refinance, it’s worth calling your current lender to tell them what you are intending to do, and why. This gives them the opportunity to offer a better interest rate or improved loan arrangement that’s more to your liking. They may be able to offer you a better deal than you’d get if you were to switch banks.
If you’re sure you’re ready to leave, now’s the time to do some serious research. Remember to compare all the factors that are relevant to why you are refinancing.
Here’s a list of useful terms it might pay you to become familiar with before weighing your options:
The lifetime of your loan. If you refinance, the term of your new loan could be longer, possibly making your monthly repayments lower (if the loan amount remains the same). However, you could pay more in interest charges over time. This is important to keep in mind when you assess all costs and benefits.
Here are some other features that may interest you and could save you money over the life of the loan.
An offset account is a transaction account linked to your home loan. Any money you have in your offset account is deducted from your home loan balance, and interest is then calculated against the reduced balance. Being a transaction account, an offset account still lets you access your money when you need it. But each day your money is sitting in your offset account, it’s working to reduce the interest on your home loan.
4. Choose a lender for your home loan refinance
There are 3 main ways to compare how to refinance your home loan.
1. Enquire directly
Go to each of the lenders you are interested in online, over the phone or in person, to get the information you need. Don’t forget to check that they have a valid Australian Credit Licence.
- You’re dealing directly with the lenders you are interested in; and
- Getting information straight from the source.
- It takes time to deal with each lender
- You may be missing out on better options from other lenders; and
- You may not understand the terms different lenders use.
2. Use comparison sites
You can search most sites for sections or keywords relating to your reasons for refinancing. They normally have a range of product features in tables ordered by lender, to easily compare similar features and fees.
Most information on comparison websites comes direct from the lenders who list on their site. So, it’s worth reading up on how they get paid and the basis on which they sort the results.
- Saves time by doing a lot of the comparison work for you
- Shows lenders you may not have considered
- The site may allow you to sort lenders based on your criteria; and
- May have articles and glossaries to help you.
- Only lenders who pay to be on the site are listed
- You may be missing out on better options from the lenders
- The information may be out of date; and
- Their recommendations may not be impartial if one lender pays the site more than another.
3. Go with a broker
Find a mortgage broker you are confident will act in your interests and make impartial lender recommendations. A key benefit is that they will complete your application and deal with the lenders on your behalf.
Brokers are paid by the lenders via commissions, based on the size and term of your home loan. So, you may want to shop around before selecting who you’ll use.
- You talk directly with the broker
- Saves time as the broker will do a lender comparison for you
- Identifies lenders you may not have considered
- Understands bank jargon and translates it for you; and
- Knows the information lenders need and how to fill in application forms.
- May not consider all lenders in the market; and
- May be biased if one lender pays them more commission than another.
5. How to apply for a new home loan
Your research has hopefully revealed the loan and terms that suit your needs and goals. Now it’s time to put in your application.
There are 3 ways you can apply for a home loan. You can start an application online, go to a mortgage broker, or complete your application by visiting branch lenders.
When you apply, you will need to provide all your information and supporting documents for the lender to decide whether to approve your application.
Details you’ll need to supply
The name, age, address, contact details and proof of identity (driver’s license, passport, etc.) for each applicant. This allows the lender to know they are dealing with the right person and can contact you easily. They’ll also need to know how long you have lived at your current and previous addresses, as an indication of your stability.
Approval and settlement
Once approved, your new lender should send you a new contract and mortgage documentation.
As with any contract that involves large sums of money, seek independent legal advice before you sign. Even then, make sure you personally understand any terms and conditions in the document. If you’re not sure – ask.
Once you’ve signed the documents, your new lender will usually organise paying out your old lender and transferring the mortgage and any other accounts that were part of your refinancing.
Once that’s all taken care of, you’ll receive a welcome kit from your new lender. This sets out the agreed interest rate and repayment terms. Check this is correct and then set up your accounts to start making your new repayments. Congratulations – you’ve successfully refinanced your home!
To sum up
- Be clear about what you want to achieve by refinancing.
- Choose the type of loan based on your needs.
- Check your financial position.
- Research all your options.
- Look out for hidden costs.
- Choose a suitable accredited lender.