Get a better rate / lower your monthly repayments
One of the main reasons homeowners choose to refinance is to get a lower interest rate. You might have purchased your home years ago, and in that time rates have risen, meaning your repayments with your current lender are now a lot more than they used to be. Or perhaps when you bought your place for $800,000, you had a deposit of $200,000 and a loan of $600,000, meaning you had an LVR of 75% and were only eligible for a certain number of rates. Now that you’ve paid it down to $500,000, your LVR has dropped to 62.5%, and you’re eligible for a better rate.
uno’s Household Financial Waste Report shows Australians are wasting an estimated $4.2 billion annually on non competitive interest rates and ineffective savings tactics. The report also looks at what savings Australian households could make if they made some changes. Per household, consumers in New South Wales stand to gain $1,300 back in lower interest payments in the first year should they switch to a better home loan, while Victorians could gain back $1,200, the report says.
Access the cash (equity) in your home
Some people refinance to access the cash (equity) in their home in order to pay for something big like renovations, a holiday to Maui or their daughter’s second wedding. We’ve had customers who’ve used equity to pay off their solar installation and buy a car – the possibilities are endless.
This works well if you have several debts on top of your home loan, such as a personal loan, car loan and credit card debt. Pulling these debts into a new home loan allows you to enjoy the lower interest rate that most home loans offer compared to other forms of credit. (Credit card debt could be between 9.99% p.a. and 21.99% p.a., for example.) It does, however, mean paying interest on the combined balance for a longer period of time (the length of the home loan), so it’s important to make additional repayments to pay off the enlarged loan sooner – or pay off a big chunk when you can.
Tips for consolidating debt by refinancing:
- Pulling high-interest debts like credit cards into your home loan could let you enjoy a lower interest rate
- However, if you don't grab the bull by the horns, you'll be paying interest on the combined balance for a longer period of time
- Win this battle by increasing the size of your repayments
- You can also make one-off payments if you find yourself with some extra cash
Adjust the loan term
Sometimes people change to a longer loan term, even if it’s only in the short term. That sounds confusing. What we mean is they may come into some unexpected financial difficulty, such as a family member getting sick and needing medical treatment; or a car accident that leads to someone being out of work for a period of time. In these situations, the person needs to minimise their repayments and it’s worth it to them to restructure their loan over a longer term (and pay a bit more interest in the long run) to alleviate financial stress. One of the lenders uno works with offers a 40 year loan term, for this reason.
Switch from a variable rate to a fixed one, or vice versa
Lenders tend to put those who’ve been on fixed rates onto a higher rate at the end of their term. This is a good time to switch to another rate. Or perhaps you’ve been on a variable rate but want to take advantage of low interest rates so you want to switch to a fixed rate. Refinancing enables you to do these things.
Access additional features
Different home loan products come with different features. Another reason to refinance is to access features that you were previously unable to access, such as the ability to make extra repayments at no additional cost, a repayment holiday, linking an offset account or redraw facility.
Loan products improve over time, so the financing arrangements you made 15 years ago may not keep pace with what’s on offer today. While basic home loan packages may offer simplicity and low fees, you could be missing out on a lot of extras that could help you better manage your finances or pay your home loan off faster.
If you do switch rates, you should take note of any ongoing fees and terms and conditions that might be included in your new home loan product. You can read more about home loan products and features here.
Features that could help you pay off your home loan faster:
- Additional repayments – this allows you to make extra loan payments without incurring a cost. Some lenders will limit the number of additional payments you can make.
- Redraw facilities – you can draw back any of your additional payments as required. This could be useful should you need emergency funds.
- Repayment holidays – this feature allows you to take a break from repayments for an agreed period. This could be useful if you enter maternity leave or take an unpaid sabbatical.
- Reduced payments – this works the same way as the repayment holiday, except that you pay a reduced amount (rather than nothing at all) for the agreed period.
- Offset account – you can use your savings to offset the principal of the loan. This means that you pay less interest over time, and can get your loan paid off faster.
- Portability – this allows you to transfer the loan to a new property with the same lender should you choose to move home.
- Flexible rates – some lenders allow you to structure your home loan so you can choose between paying a fixed or variable rate as it suits you.
Refinance for a better rate vs. home equity loan / cash out finance
Many people refinance simply to get a better rate. They may have bought their home 15 years ago and become complacent, never buying it flowers anymore and failing to check whether they could switch to a better deal. If it turns out there is a better deal for you, switching your rate can be a great way to save money. You’ll likely pay less interest than you were paying before and with the extra money in your pocket you can do a whole gamut of wondrous things, such as buy that jetski you’ve always wanted (no judgement here), or book that trip away without the kids.
Cash out refinance is a different kettle of fish altogether. In this situation, people gain access to the cash in their home. It’s not literally in their home under the floorboards or anything like that (“There’s always money in the banana stand!” – George Bluth) but refers to the difference between the value of your home and the amount you still owe on it. Thanks to the significant rise in property prices over the last decade or so, it could be a substantial sum.
For example, let’s assume you bought a house 10 years ago for $500,000 and have $200,000 left on the home loan. If this property is now valued at $800,000 then your equity is $600,000.
Most lenders allow borrowing of 80% of the value of the property, minus the debt that you have left to pay. So in this example, you could access $440,000 of your equity. With this sum, you could make significant investments and potentially take advantage of tax benefits – such as depreciation and negative gearing on an investment property – to get your money working for you.
Both ways of refinancing are essentially designed to save you money – but not everyone will have equity in their home, whereas if you purchased your home years ago, there’s a good chance you now qualify for a better rate. Research we commissioned found homeowners who stick to their current interest rate end up paying $1,092 more per year on a $500,000 mortgage or $32,760 over a 30-year loan than those who refinance**.
Speak to uno about which method of refinancing is best for you and if you’re interested in a property value estimate, finding out your total savings over the life of the loan and hearing about the lowest rate home loans from Australia’s top lenders, click below for your free, tailored home loan report.
How soon can you refinance your mortgage?
To be honest, you can review your mortgage at any time, however be aware that you may have to pay break costs (exit fees) if you have a fixed rate. Break costs are fees charged by lenders when you pay out a fixed rate loan before the fixed rate term has expired. Depending on where you are in the fixed term, the break fees could be anywhere from a few hundred dollars to a few thousand.
But, sometimes the savings you’ll make on a loan will negate the break costs. Kaching! uno can help you work out whether it’s a good idea to refinance at this time and which lenders might suit your financial situation.
If you’re on a variable rate, you won’t have to pay any break costs. At one time you did: what used to be called the deferred establishment fee (penalty rate) was abolished by the government in 2011, so now you cannot be charged a penalty if you decide to switch rates while on a variable rate.
Is it bad to refinance?
If you’re refinancing to take cash out, otherwise known as borrowing against the equity in your home, this may be to pay for renovations or a new car, or something else that you want need. And this is totally normal if you’re into that sort of thing. What you should be aware of however, is that by refinancing to take cash out of your home, you’re essentially digging into the money that’s already been paid off your loan – and increasing your loan amount again.
If you’ve being paying off a 30-year loan term for five years, for example, and make the decision to refinance, once you extract the equity in your home, you may be forced to increase your loan term to 30 years once again. So, if you’re refinancing to pay for a chin lift or that $7000 Balmain leather biker jacket, maybe think twice. No amount of money is going to make you look like Ryan Gosling. Plus, if you continue to withdraw more equity to pay for more things, you may find yourself never paying off the principal part of your loan and will end up working ‘til you die. Not ideal.
Research commissioned by uno and conducted by Core Data found those who shop around for a better rate actually pay an average of 30 basis points less on their home loan than those who stick to their current interest rate. AND, these people, unloyal as they are, ultimately end up paying less over the life of the loan – $1,092 per year on a $500,000 mortgage or $32,760 over a 30-year loan (comparing the mean interest rate of 4.27% among mortgage customers who compare their rate every six months with the mean rate of 4.58% among those who never compare using a $500,000 principal and interest loan over a 30-year period.)
As our CEO, Vincent Turner, says: “Banks don’t always love you back for blind loyalty and not looking over the fence can have a significant cost.”
How much does it cost to refinance a home loan?
It usually doesn’t cost you anything. However, you may have to pay some upfront costs to register the mortgage under the new lender and you may have to pay break costs if you are on a fixed term loan. uno can help you work out whether it’s worth switching home loans while on a fixed rate – or better to wait ‘til the end of the fixed rate term.
What are today’s mortgage rates?
With interest rates currently set at 1.50%, you’ll see lenders advertising rates around 3.59% p.a. (4.41% p.a. comparison rate*) and 3.72% p.a. (3.75% p.a. comparison rate*). But not all rates are are available to all people. Say what? Yup. The rate you can apply for will depend on how much equity you have in your home, your credit score and employment situation, among other things. Check out our best rates page and speak to a uno adviser about what options are available to you.
Which documents are needed to refinance a home mortgage?
When you refinance a home loan, you’ll be expected to provide proof of income (e.g. payslips and bank statements for the current loan) and photo ID.
You’ll also need to show you have a good history of making payments (most lenders will want to see at least 6 months of solid payment history). This will also help you qualify for a better rate.
You can find more information about how to refinance and the home loan application process here: How to refinance a home loan
How many times can you refinance your mortgage?
There is no limit to how many times you can refinance, although you will face a small impact on your credit score each time you do. Note that enquiring about a loan through uno doesn’t show up on your credit report. How good is that?!
Can refinancing hurt your credit?
Yes it can. When you apply for any loan, your lender will check your credit score. Having a lender review your credit history shows up in your report as a credit enquiry – however when uno makes the enquiry to begin with, it will not show up on your credit report. Each new enquiry by a lender can knock a few points off your credit score. That’s why we reckon it pays to find a refinance deal with us – because we can search for the right option from our panel of more than 20 lenders, so you don’t have to shop around making loads of enquiries with every bank in town.
From our blog
Want even more information about how refinancing your home loan could make a big difference to you?
Add these to your reading list.
“All I was doing was servicing my old loan. I didn’t know I was allowed to use the equity to buy other things.”
To find out how to avoid over-committing to a huge mortgage, we’ve sourced tips from someone who’s served time on the other side of the fence – in some of Australia’s biggest banks.
Can’t be bothered switching? Think it’s too soon to refinance? Delve a little deeper and you’ll realise the potential savings are enormous, writes Nicole Pedersen-McKinnon.
uno is an online mortgage broker. The information above is general in nature, and you should always seek professional advice when making financial decisions.
*WARNING: This comparison rate is true only for the examples given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. The comparison rate is calculated on the basis of a loan of $150,000 over a term of 25 years.
** Comparing the mean interest rate of 4.27% among mortgage customers who compare their rate every six months with the mean rate of 4.58% among those who never compare using a $500,000 principal and interest loan over a 30-year period.