What is home loan refinancing?
Refinancing your home loan means moving your home loan balance - the amount of money that you still owe - from one bank to another.
In the process, you take out a new home loan with a new lender. This gives you the opportunity to choose a completely different home loan product to the one you currently have, so it's worthwhile doing your research.
You might choose a home loan with a potential lower annual interest rate, fewer fees or different features to those offered by your existing lender.
You could also switch from a variable interest rate home loan to a fixed rate loan or split your balance between two new home loans with different interest rate types.
Depending on which bank or lender you switch to, refinancing your current loan might even come with incentives such as cash back on your new home loan.
Want to know more about how this works? Read on to learn how to refinance a home loan.
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:
Save money with a lower interest rate or reduced fees
Reduce your repayments
Borrow more for a renovation, investments, or a new car
Lock repayments in with a fixed rate home loan
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.
5 Steps to refinancing your home loan
1. How to understand 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, like your current property valuation. This may help you decide if now’s the right time to refinance.
What lenders look for – the three ‘Ps’ of lending
Lenders are generally interested in three things, sometimes known as the ‘three Ps’.
What’s the general reason you want to refinance? Are you looking for a better rate or extra features? This info lets the bank suggest the right kind of features and product(s) you’re looking for – and assess the relevant risks.
Are you someone likely to pay back their loan?
Potential lenders use a credit report to help them decide whether to offer you credit and at what terms. As well as providing a summary of how you’ve handled your credit accounts, it also includes any ‘red flags’ or indications of poor repayment history. Have a look at your credit report and check it’s factually accurate and complete.
Your credit report contains many details about you, including:
Credit application details, including mobile phone payment plans
Current credit card(s), debt, and loans
Defaults, bankruptcies, debt agreements and credit infringements
Payments missed over 60 days for utilities (electricity, water gas) and phone (home, mobile, internet).
Check it carefully. If you spot something that’s inaccurate or incomplete, arrange to have it corrected before applying to refinance your home loan.
Can you afford the repayments? Should something go wrong, how would the bank be able to recover the loan?
Westpac’s Mortgage Repayment Calculator estimates how much you could be paying on a new home loan. If your repayments stay the same or reduce and you’re currently comfortably making your repayments, this shouldn’t be an issue. If your loan repayments increase, you’ll need to be able to meet these new fortnightly or monthly repayments comfortably.
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.
Your deposit (or equity)
If your LVR’s 80% or higher, you may need to pay Lenders Mortgage Insurance (LMI) Mortgage insurance protects the lender if their loan isn’t repaid and you may also pay a higher interest rate.
Increasing your loan
Switching home loans to a new lender could give you access to extra finance for things like renovating or adding an eligible solar power system, though loan approval will depend on your personal financial circumstances.
2. Compare home loan options
Now that you know why you want to refinance, it’s time to look at your future refinancing options.
Before you decide , it’s worth calling your current lender to tell them what you plan to do, and why. This gives them the opportunity to offer a better rate or loan arrangement that’s more to your liking.
If you’re sure you’re ready to leave, now’s the time to do some serious research. Remember to list all the pros and cons of the new loan compared to your current loan. Here are some useful terms to help:
Loans and options
Most lenders offer a range of home loans, features and offers, including owner occupier loans and investment home loans, basic home loans, standard variable with offset, fixed loans, construction loans and package or promotional discounts.
The lifetime of your loan. If you refinance the same home loan amount for a longer term, your monthly repayments could be lower. But you could pay more interest over time – bear this in mind when assessing your cost savings.
Introductory or honeymoon rate
A discount on the standard variable rate that applies for a fixed period. Usually, 1 to 2 years. Check all the other interest rates (particularly their comparison rate) and fees to confirm it’s a good deal.
The annual interest rate on your loan expressed as a percentage, used to calculate interest charges on your home loan balance (what you still owe). Our refinance calculator works out potential life-of-loan interest savings based on your current loan's estimated total interest, compared to a Westpac home loan.
Variable interest rate
On variable rate home loans, the lender may change the interest rate anytime, depending on market conditions, after notifying you.
Fixed interest rate
On fixed rate home loans, the rate won’t change for a set period, often 1 to 5 years.
Helps you compare one loan with another so you know how much you will pay over the life of the loan. While the interest rate is a major part, it’s not the only cost. There are other fees and charges that affect the true cost of the loan. The comparison rate calculates the applicable bank fees of setting up the loan, like establishment and service fees. The comparison rate doesn't include government charges or early pay out fees.
Service and admin fees
Home loans can have ongoing fees, like service or admin fees.
If you repay a fixed rate home loan before the end of the fixed term, you may be charged a break cost or exit fees (early repayment fees). The cost is often calculated using the difference between the fixed interest rate and current interest rates. Ask your lender for a quote on your current break cost.
Your lender may charge a fee when the home loan is paid out in full, on top of any fixed loan break costs.
If the new lender needs to check your property’s value, they may arrange for a property valuation by an independent valuer.
Based on the amount owing on your loan, your loan term and the current interest rate. With a longer term, your repayments will be lower, but you’ll pay more in interest over the long run. On a variable loan, your repayments may change in line with RBA rates. Repayments shouldn’t change during a fixed rate period.
Most lenders let you make extra repayments that will give you a loan term reduction.
And if you choose Principal and Interest repayments, you’ll reduce both the interest charged and the amount you borrowed (i.e., the principal). 1-5 year interest only repayments just count towards interest charges, and don’t reduce the principal. This means lower repayments on interest only loans, but potentially higher interest charges over time.
Some other features that may interest you and could save you money over the life of the loan.
A transaction account linked to your home loan. Any money 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. You won’t earn interest for money’s sitting in your offset account, but everyday it’s working to reduce the interest on your home loan.
This feature lets you pay off more than the minimum repayments on your home loan, to reduce your interest. But should you ever need these extra funds, you can redraw the extra money which is then added to your loan balance, and accrues interest. Remember, on fixed loans, there’s a prepayment limit before break costs apply.
This allows you to stop making repayments to your loan if you’ve built up extra funds in it. Repayment during the pause can come out from funds held in your redraw facility.
It doesn’t save you interest or reduce the amount of the loan, but it does help you manage your cashflow, help alleviate financial pressure and let you concentrate on getting back on track.
If you don’t have enough redraw to cover the approved pause period, you’ll need to make up any missed payments once the repayment holiday is over.
A parental leave mortgage reduction is also an option that can help if you’re expecting a family and need to free up cash to cover the cost of your new arrival.
Have part of your loan on a variable interest rate and part of your loan on a fixed rate, split loans means you can get the best of both worlds.
This lets you change the property held as security, without having to change your ongoing home loan arrangements. Portability can help reduce time and effort when moving your home loan to a new property and avoid costs like discharge and application fees.
Other products or services
The new lender may offer package discounts on other products or services such as transaction accounts, credit card(s) and insurance. Check they’re relevant to you and the savings enhance the overall refinance.
When comparing lenders, it’s important to compare all the options, including interest, fees, charges, and any incentives for switching. What may first seem an attractive deal may not hold up under scrutiny.
3. Choose a lender for your home loan refinance
There are 3 main ways to compare how to refinance your home loan.
One: enquire directly
Go to each lender online, over the phone or in person, and don’t forget to check they have a valid Australian Credit Licence.
It takes time to deal with each lender
You may be missing out on better options from other lenders
You may not understand the terms different lenders use.
Two: using comparison sites
You can search most comparison 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 info 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 let you sort lenders based on your criteria
May have articles and glossaries to help you.
Only other lenders who pay to be on the site are listed
You may be missing out on better options from the other lenders
The info may be out of date;
Their recommendations may not be impartial if one lender pays the site more than another.
Three: going with a broker
Find a mortgage broker who’ll find a range of options to match your plans. A key benefit is they’ll complete your application and deal with the lenders on your behalf.
Brokers are paid by the lenders via commissions, based on loan amounts and your home loan term.
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
Knows the info lenders need and how to fill in application forms.
4. How to apply for a new home loan
Your research has hopefully revealed the eligible home loans and terms that match you and your plans. Now it’s time to put in your application.
There are 3 ways you can apply for a home loan. You can generally start an application online, go to a mortgage broker, or complete your application by visiting branch lenders.
You’ll need to provide your info 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 two types if ID (Australian driver license, passport, Medicare card, Australian birth certificate) for each applicant. This is so your new lender knows they’re dealing with the right person and can contact you easily. Alternatively, we may be able to securely verify your ID online in minutes. They’ll also need to know how long you’ve lived at your current and previous addresses.
This includes your relationship status and the number of dependents you support, as they may affect your income and expenses.
Your employer’s (and/or accountant’s) business and contact details, to establish your stability and income to repay the loan over a long period of time.
Your current income, with evidence such as pay slips and income tax returns to verify it.
You’ll have the option to securely auto-verify your income paid to other financial institutions.
Your current expenses, with evidence of bank statements, copies of bills etc. to verify them.
Things of value you own, to show that you’ve accumulated wealth over time and could help to repay part or all your loan. These could be property, investments, cars, contents of your home or even collectables. The lender may ask for supporting documents to check the value of some of these assets.
Money you owe other people that will need to be paid back now, or in the future. For example, an existing home loan, investment loans, credit cards, a personal or car loan etc. This will need to be supported by documents proving the amount owed and the repayment arrangements.
Details of your current loan and property
Enough detail for your new lender to be able to first pay out your existing loan and then transfer the property deeds and mortgage.
Once the lender has these details, they’ll ask your permission to make a credit check to ensure your financial records match those you’ve provided.
5. Sign your new home loan contract
Loan approval, loan settlement
Once approved, your new lender should send you a new contract, mortgage documentation.
As with any contract that involves large sums of money, seek professional advice from an independent legal specialist 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. Delays from your old lender can affect your loan settlement date.
If you’re eligible for Westpac’s Priority Refinance (PDF 118KB), you may be able to access your new Westpac loan within days of signing your loan documents^^.
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 it’s correct 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.