How to refinance a home loan

Are you someone who’s 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 to check what’s on it and whether it’s factually accurate and complete.

Your credit report contains many details about you, including:

• Personal details for identification
• Credit application details, including mobile phone payment plans
• Current credit card(s), debt, and loans
• Repayment history
• 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.

You can get a credit report from Equifax, Illion or Experian, among others.

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.

A lender may offer you a rebate or cash back to entice you to refinance with them. Cash back is a cash refund that you get after taking out a loan. Whereas a rebate is purely a reduction in the balance of the loan. Remember to compare all other interest charges, comparison rates and fees to confirm if this is a good deal.

A discount on the standard variable rate that applies for a fixed period. Usually, 1 to 2 years. As with cash backs, check all the other interest rates (particularly their comparison rate) and fees to confirm this is a good deal.

This is the percentage your lender uses to calculate interest charges on your home loan balance (what you still owe). 

An interest rate that the lender may change at any time, depending on market conditions, after notifying you.

On a fixed rate home loan, the interest rate will not change for a specified period. Often 1 to 5 years.

The comparison rate 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 component, it’s not the only cost. There are other fees and charges that affect the true cost of the loan. The comparison rate calculates fees associated with setting up the loan, such as establishment and service fees. It doesn't include government charges or early pay out fees.

There may be ongoing fees, such as service or administration fees, charged by a lender. You should consider these when comparing different offers.

If you repay a fixed interest rate loan before the end of the fixed interest period, you may be charged break costs or exit 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 costs and how they calculate the figure for you to repay your loan.

Your lender may charge a fee when the loan is paid out in full, on top of any break cost, if applicable. When you refinance, you are paying your lender out in full, so this fee type may apply.

If the lender requires verification of your property value, they will arrange for a property valuation to be done by an independent valuer. The resulting valuation may have a bearing on the amount you will be able to borrow or refinance.

These are calculated based on the amount owing on your loan, your loan term and current interest rate. With a longer term, your repayments will be lower, but you’ll pay more interest in the long run. If your loan is variable, your repayments may change in line with updates to your rate. Repayments should be the same every time for the fixed rate period on a fixed rate loan.

If you choose Principal and Interest repayments, each instalment you make will reduce both the interest charged on your loan and the amount you borrowed (i.e., the principal). Interest-only repayments only count against interest charges and don’t reduce the principal. This means lower repayments but also potentially higher interest charges over time.

If you've paid off more than the minimum repayments on your home loan, a redraw facility lets you withdraw the extra money you've paid into your home loan. This can be useful if you have extra money that could be stored in your home loan to reduce interest, but that you may wish to use in the future. Any money you then withdraw will add to the loan balance that accrues interest.  However, the redraw balance may be reduced by interest charged on your loan if it's not used.

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 during the period you need it. That way, if you have unforeseen circumstances that affect your finances, a repayment holiday can help alleviate financial pressure and let you concentrate on getting back on track.

If you don’t have sufficient 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.

Offers you the ability to have part of your loan on a variable interest rate and part of your loan on a fixed interest rate, which means you get some benefit from both options.

This lets you change the property held as security, without having to change your ongoing home loan arrangements. Portability can help reduce the time and effort when moving your home loan to a new property and avoid costs such as discharge and application fees.

The new lender may offer discounts on other products or services such as transaction accounts, credit card(s) and insurance. Check if these are relevant to you and the savings enhance the overall refinance.

When comparing lenders, it’s important to compare all the options, including interest, fees, and charges, along with any incentives for switching your home loan. What may first seem an attractive deal may not hold up under scrutiny.

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.

Your current expenses, with evidence of bank statements, copies of bills etc. to verify them.

Things of value you own, to show that you have accumulated wealth over time and could help to repay part or all your loan in need. These could be property, investments, cars, contents of your home or even collectables. The lender may request supporting documentation to verify 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, a current home loan, credit card, personal or car loan etc. This will need to be supported by documentation verifying the amount owed and the repayment arrangements.

Enough detail for your new lender to be able to first pay out the existing lender and then transfer the property deeds and mortgage.

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.