Refinancing your home loan can help you reach your financial goals sooner. It’s also simpler than most people think. Borrowers are in a great position to refinance their home loans given the competitive Australian market and ease of open banking laws.
With property values increasing and interest rates relatively low, knowing when and how to refinance for a better deal is crucial. Here’s a guide to help you understand if refinancing makes sense for you.
What is a home loan refinance?
Refinancing your home loan means that you switch from your current home loan to a new one that has greater benefits, such as a cheaper loan with a lower interest rate and beneficial features. You can refinance with your current mortgage lender or a new lender altogether.
An overview: Why refinance a home loan?
A home loan is one of the biggest investments people can make in their lifetime. Whatever your personal or financial situation, make sure that your home loan has the benefits you need for the goal you are trying to achieve.
Don’t assume your home loan offers the best value. Interest rates continually fluctuate and new competitive mortgage products enter the market. Therefore, investigating refinancing alternatives to your existing home loan makes sense. Especially when you could save thousands and even tens of thousands of dollars over the life of your loan. As well as ensuring you’re not paying any more than you should.
You can also refinance your home loan in order to borrow more money, switch to a more suitable loan product or access extra features like an offset account. Other benefits could be the option to consolidate your debt, a special offer, flexible loan terms, or smaller fees.
The benefits of refinancing
There are a significant number of benefits that come with refinancing your home loan:
- Save money with a better interest rate
- Repay your home loan sooner
- Get better loan features, benefits and flexibility
- Access to equity when you need
- Consolidate debt and streamline payments
Save money on repayments
The major benefit of refinancing your home loan is that you will save money. By switching home loans to one with a lower interest rate, your monthly repayments will decrease. The potential savings of reduced repayments could be substantial.
Home loans with cheaper fees and associated costs will also mean you keep more money in your pocket. A simple comparison equation using our home loan refinance calculator will show how much extra money you could be saving.
Repay your mortgage faster
Whatever your personal circumstances, the financial freedom gained from owning your own home outright is a goal of many Australians. By switching lenders or home loans to one with a cheaper interest rate, you will reduce your overall interest balance. This will in turn reduce the total amount of money you need to repay over the life of your loan. Potentially saving you tens of thousands of dollars.
Refinancing your home loan while keeping your monthly repayments at the same amount could also reduce the length of your loan term. For example, this could mean paying off your mortgage within 25 years, instead of 30 years.
Access better loan features, benefits and flexibility
There is no one size fits all home loan. A home loan must fit your personal and financial situation. It should also offer effective benefits outside of interest rates that you will actually use.
Additional loan features can help you in the short and long term. The right home loan product can include features that provide:
- Increased flexibility
- Streamlined online or mobile banking products
- Access to an offset account
- The ability to make extra repayments
- Lower fees
Equity is the difference between the overall value of your property and the amount still owed on your home loan. Or put simply, it’s the total amount of money that has already been paid off on your home loan. As your property value increases, consequently so will your equity.
You can access equity through a cash-out option when you refinance your home loan with a higher loan amount. How you use the money from your equity is up to you. You may choose to access equity to make home improvements to further increase your property value, put down a deposit on an investment property, purchase other assets or take a holiday.
Other reasons why you should refinance your home loan
There are numerous situations where refinancing your home loan might be a good idea, including:
- Changing to a fixed rate mortgage
- Debt consolidation
- Lengthening or shortening your loan term
- Eliminating lenders mortgage insurance (LMI)
- Boosting your retirement savings with a reverse mortgage
- Taking advantage of a special offer
How do I decide if I should refinance?
Whether you should refinance your home loan or stick with your current loan can only be determined by weighing up your options. Seek out advice, investigate and compare different mortgage options to find a solution that is best for you.
Before you decide to refinance your home loan:
- Assess your current financial situation
- Compare options using a home loan refinance calculator
- Understand the pros and cons of refinancing
- Find out the process and any refinancing costs
- Consider the best timing
When should I refinance?
Timing is important when deciding to refinance your home loan. Factors that influence this are interest rates and your personal credit score.
When your credit score increases
Your credit score provides financial institutions with insight into your ability to pay off debt. The higher your credit score, the more reliable and risk-averse you appear.
This is an important factor for lenders and mortgage brokers when offering home loan applications. Your credit score influences the options available to you for the total loan amount you can borrow, loan terms and even interest rates.
When interest rates are low
Timing is important when refinancing. When interest rates drop, this is a good time to investigate your refinancing options so you’re not paying any more on your home loan than you have to.
If you’re paying a high interest rate, refinancing your home loan to a rate lower than your current rate could save you a lot of money. By locking in a fixed rate loan at a low interest rate, not only will your monthly repayments be lower, the total amount you need to repay over the life of your loan will be significantly less.
When can I refinance?
There are so many beneficial reasons to refinance. While knowing when you should refinance is one thing, knowing when you can is another. A home loan is one of life’s biggest expenses. Seek as much advice as possible before deciding to refinance so that the option you choose is relevant to your personal and financial situation. The savings could well be worth the work.
Why shouldn’t I refinance my mortgage?
Qualifying for a home loan in the past doesn’t always guarantee you’ll re-qualify with a new lender. When it comes to refinancing your mortgage, you will need to submit a new application as you did the first time around.
Ensure that you avoid these common refinancing mistakes by considering all associated factors.
When processing an application to refinance your home loan, different lenders will have different eligibility criteria, and terms and conditions. All loan applications within Australia are subject to final lender approval, which includes the lender reviewing your ability to make repayments, Loan-to-Value Ratio (LVR), debt to income ratio, the status of your employment or any other unique financial circumstances that may impact either the lender or borrower.
Personal and financial circumstances
If your income, proof of deposit or status of employment has changed since your previous application, it may negatively impact your chances of approval. This is also true if you’ve previously defaulted on home loan repayments. Additionally, if you get denied for a new loan application it will be reflected in your credit and loan application history. This may make the next refinance application more difficult.
High loan-to-value ratio
If your Loan-to-Value ratio (LVR) is quite high, lenders will also take this into consideration when reviewing your application for credit. The size of your LVR typically relates to the amount of debt you may have. Therefore, the lower the LVR you have, the more likely you will be offered a lower interest rate home loan refinance.
Refinancing your home loan may mean you will incur fees from your current lender. These could be discharge fees, early exit fees or break cost fees. Your new home loan will also attract its own fees for set-up and establishment.
Summary: should you refinance?
Refinancing or switching your home loan can be one of the best financial decisions you can make. It could be the difference in owning your own home sooner. Compare the home loan market to understand if your current lender has the best loan for you.
It’s often easy to assume that once you’ve reached a settlement on a new home loan, you don’t need to worry about it much more. Especially when you’re making regular mortgage repayments in line with your loan term. However, once you’ve had a home loan for a few years, it’s a good idea to consider refinancing your home loan.
Refinancing can offer you increased benefits, such as access to equity for property renovations or to purchase an investment property. Or an opportunity to lock in a fixed interest rate, consolidate your debt, access to an offset account, the ability to make extra mortgage repayments or greater flexibility.
If you are thinking of refinancing your mortgage, check out Homestar Finance’s home loan refinancing page for more information. With a range of products available, Homestar Finance is driven to help our customers find the product terms, rates and features that will help you best in the long run.
For more information, contact our customer service team.
Disclaimer: This article is not intended as legal, financial or investment advice and should not be construed or relied on as such. Before making any commitment of a legal or financial nature you should seek advice from a qualified and registered Australian legal practitioner or financial or investment advisor.