When should you refinance?

When should you refinance?

1 Apr, 2020

There’s no doubt that entering into a mortgage is one of the longer–term commitments you’ll make in your life. However, there’s no reason that you necessarily have to stay loyal to the same lender during the course of that home loan, if the terms are no longer serving you. If you feel like you’re not getting the best possible deal out there, refinancing your home loan is an option. This is when you can take out a new mortgage to pay out an existing loan.

There are several reasons a homeowner may choose to refinance their home loan beyond just trying to secure a better deal – some may choose this option due to a changed financial situation or to unlock equity for other purposes. That said, refinancing your home loan isn’t always the right choice. It comes with its own advantages, disadvantages and challenges, and timing is crucial to ensure it doesn’t leave you worse off financially. Here, we weigh up the pros and cons to help answer the age-old question: “how do know when it’s time to refinance your home loan?”

What are the benefits of refinancing?

Can I save money on my home loan?

This is the number one reason people choose to refinance their homes. They’re on the lookout for a cheaper home loan, which generally means lower interest rates and/or fewer fees. Switching to a more affordable home loan rate could save you tens of thousands of dollars over the course of your mortgage.

For example, if you have a $600,000 loan owing on a 30-year mortgage, paying 4.9% per annum – your monthly loan repayments would be $3185, according to our loan repayment calculator. However, if you changed to a home loan provider with a rate of 4.2%, your monthly repayments would drop to $2935. That would shave $90,000 off your repayments over the course of your loan!
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Can I repay my mortgage faster?

By switching to a lower home loan rate but sticking to your original repayments, you could cut years off your mortgage rate. There are a number of benefits to reducing your home loan period. Firstly, you’d be ridding yourself of debt earlier, which can give you a lot of peace of mind! It also means you’d be able to release equity in your home earlier, which can give you a better return on investment if you decide to sell the property.  Lastly, by paying off your mortgage faster, you can also save yourself some serious money down the track.

Related article: We’ll save tens of thousands by refinancing our mortgage

Can I unlock equity?

When reducing your interest rate, you also reduce the balance you still have owing on your mortgage, which means more equity for you to access. This is the difference between your home’s value and the amount you owe on your home.

Why would I refinance to unlock equity?

There are a few different reasons a homeowner may choose to refinance to access the equity in their home. One of the most common is to invest, whether that’s purchasing a property to rent out or other asset classes like stocks or business opportunities. Others choose to refinance to put the money back into their property – for example, for renovations and repairs. You can also refinance to pay off urgent bills, consolidate debt obligations or even pay for personal things like a holiday or a family car.

How can I refinance to unlock equity?

The first step in refinancing is getting a valuation – where an experienced valuer determines the current value of your home. This is because as well as looking at how much you’ve paid off your loan, lenders also look at the appreciation of your property. 

What is Appreciation?

This is how much the value has increased over the course of your mortgage so far due to fluctuations in the property market.

Lenders use this to determine your current loan-to-value ratio (LVR) and generally, will lend you enough to increase this to 80%. For example, if you have a $420,000 mortgage on a $700,000 property, you could have $300,000 worth of equity and an LVR (loan-to-value-ratio) of 60%. By taking $140,000 from this equity, you can raise your loan-to-value-ratio to 80% and put the funds towards a deposit for an investment property.

Although this is less than the total equity you have available, taking out more than this would raise your LVR to over 80%, making you liable for the added cost of Lenders Mortgage Insurance (LMI)

Can I get my finances in order?

We all go through tough times, and if your wallet has taken a hit, refinancing could be just the thing you need to get back on track. Some people choose to refinance their properties in order to sort out their existing financial obligations. These include:

Can I rebuild my bad credit?

If you took out a specialist mortgage for people with bad credit scores, your interest rates are likely sky-high. The good news is, it doesn’t have to be forever and there is a way out! As long as you’ve paid any defaults and they no longer appear on your credit report, you’ve been regularly making repayments for the last six months and have built up enough equity to owe 80% or less of the property’s value, you may be able to refinance your loan with another lender with lower interest rates.

What if I’m falling behind on home loan repayments?

While some people refinance to get out of bad debt loans, others go the opposite way by switching to a specialist lender – and there’s a good reason why! To save their homes, if they have been falling behind on their mortgage repayments. If you find your mortgage repayments in arrears due to personal circumstances like job loss, injury or death in a family, your first call should be to your current lender who may be able to alter the terms of your loan or give you a repayment holiday. But if that is unsuccessful, refinancing with a specialist lender can be a strategy to get you back on track. However, it’s important to remember that this should be a temporary solution until you get back on your feet, as the interest rate could be much higher.

Can I refinance to consolidate debt?

Compared to other forms of debt, home loans charge a fairly low interest rate. So, if you have other debt obligations like credit cards, you may choose to refinance these to roll them into just one repayment. These types of debt typically charge anywhere from 15-20% interest, compared to home loans at around 4%. Not only would consolidating debt mean you’re paying a much lower interest rate, it also means they’re combined in one single payment. That means less juggling – and potentially, missing – bill repayments.  It also means you won’t need to pay separate fees from your financial institutions.

Related article: Refinancing your home loan to consolidate debt

Can I get access to better features on my home loan?

Not all home loans are created equal!  Some come with ‘bells and whistles’ that cost hundreds of dollars, but don’t really benefit your individual situation. However, when you have the right home loan features for your needs, it can help make managing your mortgage much smoother and help you pay it off faster. If your current lender doesn’t currently offer these, you may choose to refinance to get access to attractive features like:

Extra Repayments

This allows you to make additional repayments at no extra cost, so you can pay off your loan faster

Repayment holidays

This allows you to take a break from making repayments, should you find yourself between jobs or on maternity leave

Loan portability

This allows you to easily take your loan with you if you move from home to home, so that you won’t need to arrange a separate loan

Package features.

Some home loans allow you to bundle together various banking products into one single fee, rather than having to pay separate fees for home loans, transaction accounts and credit cards

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When shouldn’t you refinance?

Despite the multiple benefits, it’s important not to fall prey to shiny object syndrome and blindly chase better mortgage deals. Refinancing isn’t a decision that should be made lightly, so it’s best to work with a mortgage broker to determine that switching is the best choice for you. In the meantime, here are some reasons to reconsider refinancing right now.

If you have a fixed rate home loan

If you’re on a fixed rate home loan, refinancing may be an expensive endeavour. These times of loans normally lock in your rate for a period between one to five years and if you break early, can result in hefty fees.

Generally, there are two types of fees you may be liable for if you exit a fixed home loan early – a discharge fee, which is usually a couple of hundred dollars, and an early termination fee which can cost you thousands.
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If the set-up costs outweigh the savings

Even if you’re not on a fixed rate home loan, there are still usually costs involved in switching to another lender. Most lenders charge application and discharge fees, meaning you would need to pay on both ends.

You may also need to pay for the cost of your valuation (which can range from around $300-$1000 in Australia) stamp duty costs and Lenders Mortgage Insurance if you don’t have at least 20% equity. Be sure to weigh up all the costs involved and ensure they don’t outweigh the savings you’d make in refinancing your home loan.

What if the new home loan doesn’t include the features I need?

While it can be tempting to chase lower interest rates, it’s important to look at the big picture. There’s a reason some interest rates are so low – because they go light on the number of features. While a no-frills home loan may be fine for some people, it’s a good idea to think about your priorities. If features like an offset account and flexible repayments are important to you, it may not be worth the trade-off.

What if my new lender doesn’t offer the service I need?

While you’re not locked in a life sentence, your home loan provider is one of the longer relationships you’ll have in your lifetime. Like any relationship, communication and compatibility are key. If your current lender has superb customer service and makes all of your dealings easy and stress-free, this may be an incentive to stay.

While you can always get a feel for what a new company is like, it’s difficult to know exactly what their service is like until you’re a customer. This is an even bigger consideration if you’re considering moving across to a low-rate lender, as they may not have physical branches and face-to-face communication.

While refinancing your home loan comes with many advantages, it’s not always the right choice for everyone at every stage in their journey. It’s important to weigh up all the pros and cons and ensure refinancing your mortgage is definitely the right choice for you.

The good news is, you don’t have to do it alone. eChoice’s experienced brokers can help you weigh up your options. If you do decide you want to take the leap, they have access to over 25 top lenders so they can help you find the right lender to refinance with.

How to refinance your home loan — The step-by-step guide

The process of securing a mortgage can feel long and arduous, but always satisfying in the long run. But what happens when you get there and realise the home loan package you’ve chosen isn’t the right fit for you? Perhaps you had some financial difficulties and opted for a bad debt home loan, but are now paying through the roof in interest rates? Or, maybe your home loan package doesn’t have all the features you need. If this is you, refinancing your home loan could be an option. To help ensure refinancing doesn’t end up costing you more than it saves you, we’ve put together this step-by-step guide on how to refinance your home loan

What is refinancing?

Refinancing is when you take out a new mortgage to pay your existing loan. It’s essentially parting ways with your existing lender and signing up with a new one. When done strategically, refinancing your home loan can save you thousands of dollars down the track. That said, it’s not always a simple process.

1. Determine the cost of your current home loan

Unless you’re on a fixed rate home loan, the interest rate you’re paying on your mortgage may have changed over time due to fluctuations in the property market. So, the first step is to check how much you’re currently paying. You should be able to access this information in your home loan statement or account information in your online banking. You can also check your lender’s website to see current rates for your home loan package or give them a call to find out – just be sure to have some account information like your customer number ready. If you’re on a fixed rate home loan, you would be paying the same amount as when you first signed up, so that should be easy to figure out. At this stage in the process, it’s also important to find out how much you’re paying in annual fees so you can factor this in.

2. Contact your lender to ask for a better deal

You don’t necessarily have to jump ship to get a better deal on your mortgage. It’s in your lender’s best interest to keep you as a customer and they will often go to great lengths to retain you! So, you may actually be able to negotiate a more suitable package without leaving said lender. With this step, it pays to be aware of the other home loan deals on the market at the moment – even if you don’t currently have one picked out. Working with a broker at this stage may be helpful, as they have strong inside knowledge of the home loan products out there and may also be able to advise on how to negotiate with your lender.

Then, it’s time to give your lender a call. There’s a couple of different ways you can approach this. You could tell them you’re thinking of shopping around for different home loans, or you could kick it up a notch and tell them you’ve already found another one. At this point, you’ll want to have your ideal interest rate in mind, based on your research.  Their retention team will then generally talk you through the options they can offer you – if any. In this scenario, you need to be prepared to follow through on your threats if they can’t offer you something better, and walk away. There’s always a chance they won’t have a better offer for you, or that if you haven’t been making your repayments on time, you may not actually be the kind of customer they want to keep!

3. Find out how much it will cost to exit your loan

Unfortunately, it’s rare to get out of an existing mortgage completely scot-free. Most lenders will charge you a discharge fee for leaving. Generally, this isn’t any more than a couple of hundred dollars, but it’s always important to check so you can factor it into your costs of refinancing. If you’re on a fixed rate home loan, the break fees can be hefty – running up to the tens of thousands – so this is even more important to check. There’s also a chance you will need to pay Lenders Mortgage Insurance (LMI) again, so be sure to check this with your lender, too.

4. Compare home loan options

So, you’ve dipped your toe in the water of comparing home loans. But if you’ve now decided that refinancing is what you want to do, then it’s time to dive right in. You can use eChoice’s home loan search tool to compare over 25 lenders on the market. Here, it’s important to look not only at the interest rate, but at the whole picture. Other factors you should take into consideration include:

Factors to consider when comparing home loan options

Other factors you should take into account include:
  1. Fees: You don’t want the cost of your new lender to outweigh your old one, so be sure to check for any fees they charge. This could include things like your annual fee, monthly service fees and late payment charges
  2. Features: While you don’t want a mortgage that’s going to cost you thousands extra for unnecessary bells and whistles, the right features can help you pay off your mortgage faster. This can include things like an offset account or a redraw facility.
  3. Flexibility: Change is inevitable in life, and a good mortgage package gives you some breathing room for this. Some flexible features you might look for in your new home loan would include loan portability, extra repayments or a more flexible repayment schedule (for example, weekly or fortnightly)

5. Determine the costs of moving to the new lender

It’s important to not only examine the fees and rates charged by your new lender, but also how much it will cost you to switch. Just like leaving your existing lender, there are usually costs involved in joining up to your new one. Some common costs involved in moving to a new lender include an application fee, a valuation fee (where the current value of your home is determined) and a settlement fee. Once you have all the information on the entry fees for your new lender, it should give you a clear idea on how much the switch is going to cost you.

6. Apply for your new home loan

So, you’ve found the perfect home loan package to refinance with. Great! But, it’s important to not put all your eggs in one basket. Just as you would with applying for a job, it’s best to have your new home loan lined up before you leave your existing one. The process of applying for your new mortgage will likely be similar to your previous one, but all lenders work in slightly different ways.

For some, the application process is entirely online, while some require you to fill out and mail in forms. Be sure to check their website or give them a call to find out what their exact application process is.  Either way, you will need to have some important information at the ready. This includes:

Personal information, such as your name, date of birth and contact details. You will also likely need to submit or send in a copy of proof of identification, such as your driver’s licence, passport or Medicare card.

Financial information: As with any loan, your lender will want to see details about your income, employment history and any financial obligations or assets.

Property information: The lender will also require information about your current property, and will also need to carry out a valuation.

Once you’ve applied, conditional approval can take anywhere from a few hours to 8 business days – it just depends on your lender.

Related article: What documents will a mortgage broker need?

7. Exit your old loan

Once you’ve been approved for your new home loan, it’s time to officially leave your old one. The good news is, your current lender will do this for you by ordering a discharge from your old mortgage. They’ll also take care of any documentation that needs to be supplied, as well as title transfer. After this, you’ll reach the settlement part of the process, where the funds and released to pay off your old mortgage.

If you provide all the necessary documentation and all goes smoothly, it may only take a few weeks to get from application to settlement. To ensure it all goes off without a hitch, be sure to take heed to the common refinancing mistakes in the next chapter.

Common refinancing mistakes to avoid

Not locking down a fixed rate

When you’re refinancing, you might opt to go with a home loan with a fixed rate. This means the rate stays the same throughout the course of the term you’ve chosen. However, there is a loophole that can trip many homeowners up – this rate can possibly change between the time you apply and when you reach settlement. This would mean that by the time your home loan officially comes through, you’re not getting the same competitive rate that was originally advertised.

As the process from approval to settlement can sometimes take up to 90 days, it’s wise to ask for a ‘rate lock’ feature when you’re applying for your home loan. This will lock in the rate for a certain period – normally 90 days – so you don’t face any nasty surprises when you settle.

It’s important to note that not all lenders offer this, or some charge a fee. So, if you’re going for a fixed rate home loan, it’s a good idea to scope this out during your initial research stage.
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Waiting too long to refinance

Timing is everything when it comes to refinancing. If you’ve already determined you can get a better deal elsewhere, you don’t want to sit on your hands too long. In the temperamental property market, rates can fluctuate drastically so you’ll want to act quickly. Always looking out for something ‘better’ on the horizon can mean you miss great opportunities that are right in front of you.

 Adding years to your home loan

When you apply for your new home loan, be wary of the terms you’re signing up for. Often, you’ll be given the option to refinance with a new 30-year home loan term. Very rarely is this a good idea! It will just increase the amount of time you’re paying off your home loan and you’ll likely end up paying more interest. The only scenario that might be an exception is if you’ve found yourself in financial hardship and you need to switch to a specialist lender in order to get back on track with your repayments and keep your home.

Refinancing when your home has dropped in value

The beauty of the property market is that usually when the value of your home moves, it’s upwards. However, this isn’t the case 100% of the time. If for some reason your property has dropped in value – perhaps due to changing demand in the area – it’s not the best time to refinance. In this scenario, your LVR (loan-to-value) ratio may not be high enough and you may end up paying a hefty Lenders Mortgage Insurance fee. Another scenario might be that you paid a small deposit when applying for your mortgage, haven’t had your home loan for very long and the value of your home has stayed the same. In this case, your LVR also probably wouldn’t be great and refinancing may be unwise. You can find about more about LVR’s here.

Being too focused on introductory variable rates

While it’s easy to be tempted by super low rates, it’s wise to take these with a grain of salt. Often, these are actually what’s known as introductory variable rates, otherwise known as ‘honeymoon’ rates. What this means is, you’ll get a low rate for one to two years, but after that period finishes, they skyrocket up 15 to 20 points. That doesn’t mean you have to avoid great introductory variable rates altogether, but you need to be aware of the rate after that so you know what you’re getting yourself into.

Ignoring the comparison rate

So, how do you know what the rate will be once your introductory variable period is over? By looking at the comparison rate! This gives you a much more accurate picture of how much your home loan is going to cost you in the long run – including any annual or ongoing fees.

Refinancing can be quite a complex process, but the amount it can save you in the long-run can make it completely worthwhile. Still not sure how to refinance your home loan, or if it’s right for you? Contact eChoice. Our brokers have access to 100s of home loan products from over 25 different lenders, giving you the best chance of finding the perfect home loan deal.

Related article: What is a comparison rate?

Words by Emma Norris.

Refinancing doesn’t have to be a difficult task with eChoice. Contact our brokers to secure a competitive mortgage rate today.

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