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.
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.
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.
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.
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.
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.
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.
Pros:
- You’re dealing directly with the lenders you are interested in; and
- Getting information straight from the source.
Cons:
- 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.
Pros:
- 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.
Cons:
- 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.
Pros:
- 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.
Cons:
- 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.
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.
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.