Home loan refinancing: a complete guide

If you’ve been paying your mortgage off for some years, it’s likely market dynamics and your financial situation have changed since you first took out your home loan. Refinancing could better align your home loan with your current wants and needs. It could also allow you access to equity in your property or see you realising a better home loan deal that could help you pay off your mortgage sooner.

But there's much to consider before you start.

What is refinancing?

Refinancing is the act of changing to a different home loan product or switching your mortgage to a different lender. It can help borrowers access better loan features, secure a more competitive interest rate, consolidate their debts for convenience, or free up funds for other purposes.

There are two types of refinancing: internal and external.

• Internal refinancing involves switching to a new home loan product with your current lender. An example might be switching from a variable rate to a fixed rate home loan, or to a loan offering different features such as an offset account.

• External refinancing means to move your home loan to another lender that might be offering a better deal or can provide features more suited to your needs.

Is refinancing right for you?

There are many reasons why people consider refinancing. A common one is they've seen better interest rates on offer from other financial institutions. Sometimes advertised rates can be well below the rate you might be paying, and you may feel your lender isn't offering the best rate possible. (There can be more to it, however, and we’ll cover that below.)

Or perhaps your existing loan doesn’t come with the features that would better suit your goals. The lending market is a dynamic place with new products, incentives, and options being regularly added.

Refinancing is also an attractive option for people who want to use the equity in their home to meet other expenses, such as buying a car, investing in other assets, or renovating their home.

Others may choose this route if they're looking to consolidate their debts. Pooling debts into a single credit facility (in this case, a mortgage) can significantly reduce some people’s debt obligations.

What are the costs associated with refinancing?

Refinancing isn’t free, especially if you're shifting to another home loan provider. Before you consider refinancing to obtain a better home loan deal, it’s vital you check the cost of terminating your current home loan and establishing a new one.

The costs of refinancing may include:

• exit costs and any deferred establishment fees (sometimes quite hefty)

• new establishment/application fees

• loan approval fees

• settlement and handling fees

• additional mortgage stamp duty

• additional lenders mortgage insurance (LMI) (generally if your equity is below 20%)

• mortgage registration

• account fees on a new loan

As a rule of thumb, borrowers should only really consider refinancing if they can recoup the costs of switching within 12 months. It’s considered better not to refinance when the exit and entry costs outweigh the benefits in the short- to medium-term.

You might find the benefits are particularly outweighed by the costs if you have a fixed rate home loan and you're refinancing to a lower or variable rate. In many cases, it’s better to ride out the fixed rate term, as you might face high exit costs when refinancing.

If in doubt, don't hesitate to consult a mortgage broker or lending specialist. They can help you assess your current financial situation and determine if switching loans is worth it. Ultimately, the goal of refinancing should be to save you money over the long term.

How do you start your refinancing journey?

Before making any decisions on refinancing, consider your current financial situation and your goals for the next three to five years.

Step 1: Take a look at your current home loan

The first step to take is to review your current home loan to assess whether it's still the most suitable for your circumstances and continues to offer a competitive interest rate. 

Step 2: Determine what you need and explore your options

One of the keys to successfully refinancing is not only reducing your repayments through a lower interest rate in the short term, but also ensuring your mortgage will (hopefully) remain competitive and meet your needs for the years to come.

You'll need to list your home loan must-haves and compare your current deal with your list to see if meets or falls short of your expectations. Some of the things you might wish to include are:

• A competitive interest rate

• Flexible features that you will use

• Reasonable ongoing fees

• Good customer support and service

Some of the most competitive home loans available on the market right now can be found below.

Important Information and Comparison Rate Warning

Step 3: Discuss with your current lender or broker

After you’ve decided you want to change your current home loan, it’s nearly always worth approach your existing lender to see if it can offer you a better deal. If you’ve got a reliable, no-fuss history, your lender might go to unexpected lengths to keep you on its books, such as offering a discounted interest rate or waiving certain fees. If this happens, make sure you get all offers in writing so you can compare the new deal to others you may consider later on.

If you engage with a mortgage broker, their first stop will generally also be to work out whether you can get a better deal by negotiating with your existing lender. If you wish to switch to a different loan product, your existing lender may also offer to reduce or waive your exit and entry costs, which may work out far cheaper than if you were to switch to a new lender. Brokers tend to have good knowledge of lenders' policies and internal workings, as well as how far they can push them.

Step 4: Apply to refinance

The refinancing process is similar to applying for a home loan all over again unless you’re refinancing with the same bank – in which case, you likely won’t need to provide as much paperwork. However, may need to undergo a more stringent assessment process, particularly if you fall under one or more of the following categories:

• Your credit record has been impaired

• Your income has changed since you first applied for your loan

• Your liabilities have changed

• You have little equity in your property

To give yourself the best chance of being approved by a new lender, the old rules apply. It’s wise to attempt to pay off as much personal and consumer debt as you can and reduce your credit card limits to manageable levels.

Step 5: Get finance approval

If you are applying to a new lender, it may take from a few days to two weeks for it to process your application. Your new lender will arrange to value your property, or properties if you have more than one, and assess your borrowing credentials.

If and when the lender is satisfied with the property and your ability to pay back the home loan you’ve applied for, it will advise you in writing of your approval. This is generally called formal or unconditional finance approval. Your broker or lender will then instruct a solicitor to prepare the loan documents on their behalf.

Step 6: Arrange settlement

The loan documents will be sent to your solicitor for review and for you to sign. Alternatively, you can go over the contracts yourself, thoroughly reading the specifics about your new mortgage arrangement.

Your new lender will arrange both settlement of your old loan with your previous home loan provider and the establishment of your new loan. This involves the exchange of titles and the lender’s registration of the mortgage over your property.

You now have a brand new loan! You should receive details on how to manage your new loan, along with any related account information, within a few days.

What are the benefits of refinancing?

Borrowers may choose to refinance if they think their current mortgage is too expensive or not as competitive as other loans on the market. It typically centres around finding a lower interest rate, lower repayments, or more flexible terms and conditions.

Here are some of the benefits of refinancing:

1. Lower repayments

Simply put, a lower interest rate will see your monthly repayments decrease – a sensible way to lighten the burden if you find yourself heading towards mortgage stress.

It’s worth noting that for some home loans, lower repayments may also mean longer loan terms, which could mean you pay more in interest over the life of the loan.

2. Lengthen (or shorten) your loan period

Refinancing can extend the life of your mortgage or shorten it – which option best suits you will depend on your goals and your circumstances. Sometimes switching to a new home loan can allow you to pay down your loan much faster by permitting more flexible repayment options.

3. Make use of your home equity

Your home equity is the difference between the market value of your home and what you still owe on your home loan. So, if your property is valued at $700,000 and you have a total of $300,000 remaining on your mortgage, you essentially own $400,000 of your property’s value – meaning you have $400,000 equity in your home.

You can access some of this capital for other purposes. You may wish to use it for big-ticket purchases or investments such as renovating your home, paying for your children’s education, or taking a holiday.

4. Consolidate your debts

Debt consolidation is another perk that borrowers can take advantage of when they refinance. Gathering all your high-interest debts and bundling them into a single debt with the relatively low interest rate of a home loan can effectively reduce how much your debts are costing you.

Refinancing your home loan can allow you to access any home equity to pay off your debts although this comes with some risks as well. It’s worth discussing the strategy with a financial counsellor before you go down this path. The National Debt hotline offers a free financial counselling service on 1800 007 007.

What are some of the potential drawbacks of refinancing?

We’ve talked about the various benefits of refinancing, but what about the drawbacks?

1. Cost of refinancing

First up, refinancing your home loan may not be the ready solution it seems if the cost of making a switch is going to soak up any monetary benefits you stand to gain. The costs always need to be carefully considered.

If it’s going to be years before you realise the ‘real’ savings of switching loans, it’s likely not worth your while.

2. Debt consolidation risk

Refinancing to consolidate your debts also comes with considerable risk. Absorbing other debts into your home loan is one way of reducing the rate of interest you pay on them day-to-day, but home loans come with much longer terms than many other debts, so you’ll need to consider the amount of interest you could be paying over a longer period.

You also need to consider that when you add more debt to your home loan, it is your home that will be at risk if you struggle to make the new repayments. Consolidating your debt is a fine strategy as long as you’re not tempted to take up more credit products in the false belief you have a clean slate again.

3. Equity access risk

While you might have a nice sum of equity built up in your home, you need to make sure you're accessing it for the right reasons. Often equity can be a result of increasing property values over time, not because you’ve made a significant dent in your home loan. This a wonderful bonus for any homeowner but it shouldn’t be looked upon as ‘free money’ (even if it is).

Used wisely, equity can fund other investments, including renovations that can further increase the value of your home, a rental property, securities, or other long-term assets. If you’re looking at refinancing to fund lifestyle choices, be sure to weigh up whether it is the best use of your ‘free money’.

Tips for a smooth-sailing refinancing journey

1. Assess your situation

Refinancing may not be the easy solution you think it will be. There is much homework to be done first. A good mortgage broker or an accountant can help you understand the alternative scenarios if you’re struggling to do the calculations yourself.

2. Be wary of eager brokers and credit providers

It should go without saying, only deal with licensed mortgage brokers and reputable credit providers. Anyone who doesn’t run through the calculations with you as to whether it’s worthwhile for you to refinance before trying to switch you over to a new loan may not be your best option.

Also, beware of schemes that advertise accessing the equity in your home to fund investments that sound too good to be true. They probably are.

3. Before shopping around, negotiate with your existing lender

Don’t do anything before speaking to your current lender. Let them know what you’re after in a new home loan and that they have first option in keeping your business before you go looking elsewhere. You may achieve the same outcome without the considerable costs of switching lenders. It’s always worth a try.

4. Maintain financial discipline to avoid incurring debt again

If you’re refinancing for debt consolidation purposes, limit your credit cards, don’t sign up to new finance deals, and save for big purchases. Consolidating debt into your home loan only works if you stop accumulating new debts.

5. Create a budget

Make a new budget after you refinance as your circumstances will have changed. If you’ve never had a budget before, it is never too late to start. Keeping a track of your money is the best base you can have for any financial decision.

6. Keep your mortgage under review

Whether you decide to stay with your current lender or refinance with a new one, it’s highly recommended you regularly review your home loan to ensure it’s still serving your purposes and is offering a good interest rate.

If you have used the services of a good mortgage broker, they can do this on your behalf and keep you in the loop of new products and features on the market that may suit your changing circumstances. When it comes to home loans, setting and forgetting can cost you tens of thousands of dollars over the term of the loan.

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