Refinance Guide
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If you’re a homeowner, you understand that a mortgage is one of your biggest monthly expenses. And with higher interest rates, increased repayments could add a burden to you and your family.
But did you know that it’s entirely possible to reduce your mortgage repayments or save on interest? The strategy: refinancing. Refinancing your home loan means replacing your existing home loan with a new one. It can be a smart financial move when you need to consolidate debt, prefer a new loan product, or want to tap into your home equity.
At Intellichoice, we keep your refinancing options open. We’ve come up with this Refinancing Guide to highlight the ins and outs of refinancing. Homeowners can understand what steps are involved in refinancing; when it’s best to do it, and explore the best loan terms, rates, and features for what’s best financially.
Our mortgage brokers work with a network of lenders and banks to provide competitive rates and unique features.
Refinancing Explained
Refinancing involves switching to a new loan to pay off the existing loan at a lower rate or with better features that a borrower can take advantage of. Refinancing is popular right now, as the housing industry has experienced successive interest rate hikes.
The process can be a big help to improve your monthly repayments, especially if you can secure a lower interest rate or unlock the current equity of your property. You can refinance with your current lender or apply at a new one – some banks offer waived application fees and cash back.
How Refinancing Works
If you decide to refinance in order to obtain a lower interest rate, you should expect to see the advantages of refinancing within two to three years of making the switch.
For instance, you have an existing home loan for $300,000 with a fixed interest rate of 5% over a 30-year term. Your monthly mortgage payment is approximately $1,610. After four years, interest rates have dropped to 4%, and you decide to refinance. You obtain a new loan for the remaining balance of $270,000 at the new interest rate but still over a 30-year term. Your new monthly repayment may approximately be $1,287. While this calculation does not include other expenses, it’s an example of how refinancing could save a couple of hundred dollars monthly and slash repayments through the years.
Now, let’s say you have been granted a 90% home loan for a $500,000 home; you’ll be required to pay about $10,000 for mortgage insurance. Your overall mortgage amount could be about $460,000.
After a few years, the value of your property may have risen by $20,000, and you might want to refinance to get a lower rate. Now, that would make sense, but you will still be paying off the loan of $460,000, around 90% of the property value. To be approved, you will still be required to pay $10,000 in lenders mortgage insurance. Refinancing, in this instance, isn’t necessarily advantageous because you’re not lowering your monthly repayments.
Why Refinance?
Refinancing is relevant when mortgage holders want to switch to a more practical home loan arrangement. The general rule is to consider refinancing every three to four years because banks usually offer better interest rates to new customers. Refinancing looks at what’s out in the market for the most suitable loan product.
The hikes in interest rates push borrowers to refinance, because if a homeowner is paying more than 30% of after-tax income to mortgage, it’s already a “mortgage stress” situation.
Fixed rate home loans were popular during the pandemic, as the interest rate was lower during that time. However, most borrowers who entered in these mortgages during the pandemic are vulnerable to mortgage stress and “falling off the rate cliff”.
Mortgage brokers have, on average, been instrumental in getting a 0.68% reduction in interest rates by facilitating refinancing for those who have fixed rate home loans. Refinancing is one way you may be able to reduce your mortgage repayments during this current climate of interest hikes.
Steps to Refinancing
Refinancing takes about four to eight weeks, from application, valuation, review of documents, to settlement. It will take longer if the lender receives a large number of new applications. You can always take advantage of fast refinance options, but take note that refinance terms and conditions and eligibility won’t be the same as a traditional loan.
Step 1: Review the cost of refinancing
There are attractive promos when banks offer refinancing, so you can take advantage of lower interest offers, refinance cash back, waived application fees, and more.
You can discuss with our mortgage broker if indeed, the refinance fees and features outweigh your current mortgage setup. Remember, while banks compete with each other, you still have to determine if the refinance option is better than what you have right now.
Step 2: Maximize your equity
Equity is the difference between the value of your property and the mortgage balance you owe on it. To avoid paying the Lenders Mortgage Insurance, you’d need at least 20% equity of the loan, and minimum 5% of equity.
Step 3: Compare home loans
Get the best help in the industry – our Intellichoice mortgage brokers have access to various reputable lenders around Australia who can cater to different financial needs. Even if you have bad credit, have certain constraints, or want to improve the interest rate, we can do the legwork in finding the ideal refinance loan.
Step 4: Prepare your documents
Banks and boutique lenders will require case-specific documents, but these are the general documents you need to ready for a refinance:
- Home loan statements (at least 6 months prior) as proof of mortgage
- Terms and conditions of your current home loan
- Updated council rates notice and insurance
- Information about your assets and liabilities (e.g., credit card, personal loan if any, car loan, etc.)
- Bank statements, details of your job and proof of income (payslips), and IDs
Step 5: Get a conditional approval
Upon submitting your application with all the documents, you can expect a conditional approval within seven business days or depending on the lender’s timetable.
Step 6: Prepare the home for proper valuation
Some lenders make do with valuation generated online, however, those with high LVR loans, banks could require an in-person valuation of the property. This is so they are able to make an informed decision about the refinancing application. Expect a couple of days to get this processed.
Step 7: Finalize the formal approval
Once you are approved, the lender will send pertinent documents you need to sign, including mortgage discharge forms, loan offer papers, titles office and other forms.
Step 8: Settle your old loan
After formal approval, your new lender will be the one to handle the switch. They will contact your existing lender to transfer the details. The new lender will outline the new loan agreement, repayment method, and any new features.
Refinancing Home Loan: What Should You Expect
Refinancing sounds appropriate for many who are struggling with high-interest rates now, but be mindful of these considerations:
Unexpected issues with the new lender. From unsatisfactory customer service, issues with post-settlement procedures, to fewer branch access and online features – these and other reasons may and other reasons could bring dissatisfaction for a mortgage holder like you.
You could pay LMI twice. If your loan value is more than 80% of the property purchase price, paying LMI when you refinance a couple of years later means you still owe more than 80% of the total property value. It could delay paying off your loans even if you end up with a lower interest rate when refinancing.
Multiple credit inquiries could affect your score. Making too many applications that require credit checks could make your credit score lower. Remember, having over four credit enquiries in a year could discourage banks and lenders from approving your refinance application.
When to Consider Refinancing
Mortgage holders can benefit from refinancing in these instances:
Get a better interest rate
Rising interest rates are major reasons why you’d want to check if other loan products are in the market. And with so many lenders and mortgage products available, borrowers have a wide range of options when it comes to interest rates. By shopping around and comparing rates, you can potentially find a better deal.
Our mortgage brokers can help you stay informed about the latest promotions and offers across banks and lenders.
Consolidate existing debt
Refinancing can be a viable solution for mortgage holders who are struggling with multiple debts and want to consolidate debt repayment. By rolling all your debts into the mortgage, you can simplify your finances, and possibly, save money paying less interest and loan fees.
One example is credit card debt. Consolidating any existing credit card debt into the mortgage could reduce your overall interest payments on all debt. You can consolidate up to five different debt facilities, and make the repayments manageable. Refinancing helps to lessen fees associated with credit cards and personal loans. Plus, you can keep track of the monthly repayment instead of multiple payments to different lenders.
Enjoy additional home loan features
Refinancing to a new mortgage plan means you could enjoy some introductory features that include any of the following:
Offset account – An offset account provides a transaction account linked to the mortgage. When interest is calculated after subtracting the deposit placed in the offset account, you can enjoy reduced monthly interest fees if the account has a sizable amount.
More flexible repayments – unlike a fixed rate home loan, refinancing to a variable rate allows extra repayments at zero cost. If you can, you can pay off the mortgage sooner.
Repayment holiday – some lenders offer a break from mortgage repayments if you change jobs, apply for maternity leave, or have an extended leave of absence.
Find out if you’re eligible for a refinance by talking to our financial experts.
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