How to refinance a home loan

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.

How to refinance a home loan.

There are 6 basic steps to successfully refinance a home loan:

1. Know why you want to refinance and what are the benefits.
2. Understand your current financial situation
3. Ask your existing lender if they can improve your current loan arrangements
4. What you need to know before you start researching refinance
5. How to compare home loan options
6. How to apply for a new home loan

1. Know why you want to refinance and what are the benefits.

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:

• Take advantage of a lower interest rate or reduced fees.
• Seek a better customer experience.
• Borrow more for a renovation, investments, or a new car.
• Compare your options once a fixed rate home loan ends.
• Reduce your repayments.
• Consolidate several loans.
• Add features such as an offset account or redraw facility.
• Incorporate other products such as: credit card(s); transaction and savings accounts; or insurance.
• Establish flexible terms such as a repayment holiday.

Taking a moment to reflect on the reason you want to refinance can be helpful in achieving the outcome you want.

2. Understand your current financial situation

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:

• 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).

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 Parental Guarantee.

3. Ask your existing lender if they can improve your current loan arrangements

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.

4. What you need to know before you start researching refinance

Before you start researching, here’s a list of terms you should understand:

• Cash back/rebate – A lender may offer you a rebate or cash back to entice you to refinance with them. Remember to compare all the other interest and fees to confirm this is a good deal.
• Introductory or honeymoon rate – A discount on the normal variable interest rate that applies for a fixed period. Usually 1 to 2 years. As with cash backs check all the other interest (particularly their normal variable interest rate) and fees to confirm this is a good deal.
• Interest – Interest is usually calculated daily using your current interest rate and the outstanding balance of your loan minus any offset account balances. It is usually charged to your loan once a month. 
• Variable interest rate – An interest rate that the lender can change at any time, after notifying you.
• Fixed interest rate – A fixed rate is an interest rate that will not change for a specified period. Often 1 to 5 years.
• Comparison rate – The comparison rate helps you compare one loan with another by incorporating fees and charges that can be incurred over the life of the loan as well as the interest rate. It doesn't include government charges or early pay-out fees.
• Application/establishment fee – The fee charged when applying for a new loan.
• Other fees – There may be ongoing fees, such as service or administration fees, charged by a lender. You should consider these when comparing different offers.
• Break costs – If you repay a fixed interest rate loan before the end of the fixed interest period, you may be charged break costs. The cost is usually 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.
• Discharge fee – Your lender may charge a fee when the loan is paid out in full, on top of any break cost. When you refinance, you are paying your lender out in full, so this fee type may apply.
• Valuation fee – If the lender requires verification of your property value, they will arrange for a property valuation to be done by an independent valuer at your expense.
• Loan term – The loan term is the period of time within which your loan is repaid.
• Repayments – Your loan repayments will be 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 will pay more interest in the long run.

Here are some other features that may be of interest to you and could save you money over the life of the loan:

• Offset accounts – 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.
• Redraw facilities – 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.
• Repayment holidays – This is a feature that allows you to stop making payments to your loan until the loan limit has been reached.
• Split loans – The ability to have part of your loan on variable interest rate and part of your loan on a fixed interest rate.
• Portability – The ability to change the property held as security without having to change your ongoing home loan arrangements.  this can help reduce time, effort and avoid cost such as discharge and application fees.
• Other products or services – 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.

5. How to compare home loan options

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.

Enquiring directly

Going to lenders directly involves obtaining going to each of the lenders you are interested in via internet, phone or in person.

Upside:

• you are dealing directly with the lenders you are interested in; and
• getting information straight from the source.

Downside:

• 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.

Using comparison sites

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:

• saves time by doing a lot of the comparison 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.

Downside:

• 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.

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.

Go with a broker

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:

• you talk directly with the broker;
• saves time by doing some of the comparison for you; 
• shows 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.

Downside:

• may not consider all lenders in the market; and
• may be biased if one lender pays them more than another.

6. How to apply for a new home loan

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: 

• Personal details – 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 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.
• Family situation – this includes your relationship status and the number of dependents you support, as they may affect your income and expenses.
• Employer – 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.
• Earnings – your current income with evidence such as pay slips and income tax returns to verify it.
• Expenses – your current expenses with evidence of bank statements, copies of bills etc. to verify them.
• Assets – 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.
• Liabilities – money you owe other people that will need to be paid back now or in the future.  This will need to be supported by documentation verifying the amount owed and the repayment arrangements.
• Information on the loan to be refinanced and the property being offered as security. You will need to provide enough detail for your new lender to be able to first pay out the existing lender and then transfer the property deeds and mortgage over the property.

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.