On the surface, mortgage refinancing offers you the chance to take advantage of a better interest rate or features, reduce your repayments or access your equity.
However, there is much to consider before making the decision. You will need to crunch the numbers, compare products, and make some assumptions about your future lifestyle and spending habits to work out what’s a good choice for you.
Refinancing can be costly and time-consuming if you try to do it all yourself.
That’s why we always recommend you speak to a mortgage expert before deciding to refinance. If you decide to go ahead, a uno adviser can help you find the product you want and make the application process as streamlined and stress-free as possible.
It can be well worth the effort. Refinancing can potentially save you tens of thousands of dollars over the long term, free up cash flow, allow you to meet other financial goals or even help you stay in your home if you are under financial stress.
Find out more:
- What is refinancing?
- Why refinance?
- Who could benefit?
- When it may not make sense
- What is the refinancing process?
- What documents would I need to provide?
- What are the costs involved?
- What to do next
What is refinancing?
Refinancing literally means financing something again. When you refinance your home loan, you pay off your existing mortgage by taking out a new loan.
Typically, you would refinance to access lower interest rates and/or a loan product that offers you better features.
Everyone’s circumstances are different, but here are some of the common reasons people choose to refinance:
Your personal circumstances change
Income and expenses change over time, so refinancing could help you better manage your financial affairs. By accessing a lower interest rate or better product features, you could potentially lessen your monthly repayments, improve cash flow or relieve financial stress.
Likewise, hard times – such as unemployment, illness or bereavement – could cause you to fall behind with your mortgage repayments. In this case, refinancing through a specialist lender could take you out of arrears.
Although you would likely pay a higher interest rate to refinance in this scenario, transferring to another lender when you have cleared your credit file and are financially stable might be an option down the track.
To consolidate debt
Some refinancers may want to roll high interest personal loans or credit card debts into their home loan to benefit from the lower interest rate available. Consolidating debts into your mortgage can help you keep track of payments, ensuring you don’t accrue fees for missed payments or further damage your credit file.
How much you can borrow to consolidate debt will depend on your personal circumstances:
- 90% of home’s value – you will need to have a history of paying your current debts on time and have a clean credit file
- 80% of home’s value – you may have missed some payments in the past, but your records show that you have met every obligation for at least six months
- 75% or less of home’s value – if your records show inconsistency with repayments on current debts, you may only be able to borrow 75% or less of the home’s value.
To access the equity in your home
Many refinance to use the equity in their home as a source of credit. This could be used to finance a renovation, purchase an investment property, buy shares or pay for other big-ticket items.
Your equity is 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.
Bear in mind though, the amount of equity you can access will depend on the lender’s valuation – and this could be lower than you expect. Many lenders also place restrictions on equity home loans because of the risk of the lump sum released not being used for its intended purpose.
To gain a better package
Some people refinance because they believe that interest rates have bottomed out and they want to lock in a fixed rate. Others do so because they are unhappy with the service levels, interest rates or fees of their mortgagee. If this is the case, it is worth telling your current lender that you are looking to refinance elsewhere as they may offer a better deal rather than lose you to a competitor.
Others may be dissatisfied with their package itself. 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. These features include:
- 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.
Not all refinancing deals come with these extras, so it’s worthwhile speaking to one of our advisers to find a product that offers the features you want.
To take advantage of promotions
Many lenders offer promotions to draw borrowers away from competitors. Sometimes this can be a cash payment in return for refinancing; other times it can be rebates in the form of waived fees or similar offers. While tempting as a short-term windfall, you need to be across the terms and conditions that apply to the new loan.
Likewise, some lenders offer honeymoon rates, which are special interest rates for a limited period at the start of the loan. Honeymoon rates usually last between one and three years, after which the loan reverts to the standard variable rate.
Who could benefit?
There are many different types of people with varying personal circumstances who could benefit from refinancing their home loan. See: Why refinance?
Generally though, it could make sense to refinance if you owe less than 80% of the value of your home, – bearing in mind that its value may have gone up significantly since you took out the initial home loan. If you don’t hold 20%, you would need to pay Lender’s Mortgage Insurance with each refinance.
Likewise, those who are on a variable home loan rate or at the end of their fixed rate terms are more likely to benefit than those on fixed rate loans who could pay significant break costs and exit fees.
Other borrowers who could benefit are those who took out a mortgage with a specialist lender because of a poor credit history. These borrowers often pay a higher interest rate for this type of loan. To access a standard home loan with a lower rate, you will need to:
- Pay all defaults so that they are no longer on your credit file;
- Owe no more than 80% of your home’s value;
- Have made all debt repayments for at least six months;
- Provide evidence of your income in the form of payslips and bank statements.
Similarly, self-employed people on a low-doc mortgage who now have the tax returns needed to prove their income could benefit from refinancing to a full-doc home loan, which usually offers a better interest rate.
When it may not make sense
We always recommend you speak to a mortgage broker to work out what’s best for your financial and lifestyle goals. But, it may not make good financial sense to refinance in the following scenarios:
When the costs of refinancing are high
If you do not own at least 20% of the value of the property, you would likely need to pay Lender’s Mortgage Insurance. This could make refinancing unduly expensive. Likewise, if your current loan is still in its fixed rate period and there are significant break costs, your savings may not be substantial enough to offset your costs.
Furthermore, you are less likely to get offered a good rate on refinancing if your credit file has taken a hit recently. Every refinancing application you make adds an enquiry to your credit score. So multiple applications in a short period could make lenders wary of lending to you.
You have nearly paid off your mortgage
It may not make good financial sense to refinance if you have nearly paid off your mortgage.
For example, you will lower your monthly repayments if you extend your loan term, but potentially pay much more in interest over the life of the loan. Therefore, it’s important to understand the total interest you pay over the repayment period when you refinance.
An amortisation schedule can be a useful way of calculating this figure. For example: assume that you borrow $500,000 at 5% for 25 years to be repaid monthly. The following table demonstrates your repayments over the course of the loan:
Here the same information is presented in a graph:
Despite paying the same amount every month, the composition of this sum changes. With each payment, more funds go to the principal and less to interest charges.
When you refinance, the amortisation process starts again with most of your payment going to interest and little towards the loan balance. Therefore, it makes sense to calculate the total interest you would pay over the life of a loan to work out which option is cheaper over time.
You may not stay in the house much longer
There are always expenses involved in refinancing and it takes time to recoup them. For example: if it costs you $2,000 to refinance and this saves you $100 each month, it would take you 20 months to breakeven and start to benefit from refinancing. If there is a good chance you may sell within this timeframe, refinancing may not be a good idea. See: What are the costs involved?
If you are nearing retirement
Many people seek to pay off their mortgages as quickly as possible to be debt free as they transition to retirement. Others may choose to invest in additional properties to benefit from the extra income sources that investment properties may provide. It’s a good idea to speak to an expert about your options.
What is the refinancing process?
The refinancing process is similar to when you took out your initial mortgage. You will need to fill in paperwork and provide your prospective lender with the documentation they need to assess your application. The process is generally as follows:
Your planning and preparation:
- Pay off your debts and ensure your credit file is clean
- Get paperwork in order
- Inform current lender of desire to refinance (sometimes they will offer a better deal rather than lose you)
- Explore the costs of exiting your current loan and establishing a new one
- Engage a uno adviser to help you find an appropriate loan.
Submit an application:
- Complete any forms needed to apply for a new loan
- Provide the prospective lender the documentation they require.
- The lender will take time to process your application
- They may revalue your home as part of their approval process or request further information from you
- If your application is approved, they will notify you in writing
- The lender will instruct their solicitor to prepare the loan documentation
- This legal contract will go to your solicitor for your review and sign off.
- Your lender will settle your previous mortgage with the remaining debt becoming your new home loan
- They will send a discharge form to the Land Titles Office in your state to deregister your previous mortgage and register your new one.
- Your lender will send you information on how to manage your loan account
- You will start making repayments, usually less than a month after settlement.
What documents will I need to provide?
Requirements vary between lenders and may differ if you are a new customer versus an existing customer switching loan products.
Generally though, you will need to prove your identification, income, assets and liabilities. There may also be some additional paperwork depending on your lender or personal circumstances.
Identification: You will need to satisfy the 100-point check of identity documents. This usually means two primary documents, or one primary and one or two secondary documents, depending on the documents’ value.
Income: You will need to provide proof of your salary. Documentation could take the form of a payslip with year-to-date income, an employment contract, or a Notice of Assessment from the ATO. Oftentimes you will need to be past the probation period at work to meet approval criteria.
If you are self-employed, proving your income can be a more challenging requirement to meet. You usually need three years’ tax returns to be eligible for a full-doc home loan.
Income can also come from other sources, such as your investments. Again, you will need to provide documentation – for instance, your tax return – to substantiate these earnings.
Assets: This is what you own outright. This could be a car or boat, savings, superannuation or investments like term deposits or a share portfolio. Your vehicle registration papers, bank statements or shareholding statements will detail the value of your asset.
Liabilities: These are things that you still have a debt on; they include credit and store cards, personal loans and vehicle financing arrangements. You will need to provide statements that provide outstanding balances. It’s important that you disclose all your liabilities, as your lender will run a credit check on you.
Additional paperwork could include a copy of your insurance policy, the valuation report, a statutory declaration saying that any funds gifted won’t need to be repaid, or council rates notices for any investment properties you own.
What costs are involved?
In many cases, the upfront fees that you pay for refinancing are lower than the thousands of dollars in interest that you would pay on your old home loan. But it is important to gauge the cost of refinancing to ensure that it makes good financial sense. These fees can include:
Home Loan application fee – Some lenders charge this fee when you apply to refinance. It may cover several upfront fees for preparing or registering the mortgage. It could cost up to $800.
Break costs – Those with fixed-rate mortgages may have to pay break costs to exit their loans early. The amount depends on the bank, and may vary from a fixed fee to a percentage of the remaining loan.
Valuation fee – Many lenders choose to revalue the property to validate it is worth the amount owed on it. This ensures that, in case of default, the lender could recover their losses through the sale of the property. This fee is usually $200-300.
Settlement and Discharge fee – Much like break costs, lenders charge these fees to release you from your current home loan. The discharge fee usually costs between $150-300.
Government fees – Several government fees may apply to your loan. You will need to pay for your old mortgage to be deregistered and your new one registered with the Land Titles Office in your state. This usually costs between $100-200.
Lender’s Mortgage Insurance – This mortgage insurance premium is a one-time fee that applies if you try to borrow more than 80% of your home’s value as part of refinancing. It protects the lender in case you default on your loan and the property is sold for less than the outstanding debt on it.
Although the borrower carries the cost for the premium, it can enable them to secure home ownership sooner. It is paid at settlement and, in most cases, can be included in the loan amount.
Ongoing fees – Many home loans come with ongoing fees that you need to keep in mind. These may include annual fees, account keeping fees and redrawing fees. Every loan is different, so you need to be aware of the ongoing costs of managing your loan aside from your interest payments to compare products accurately.
Note that not all of these fees may apply to your refinance and a uno adviser will help you negotiate a good deal.
What to do next
This provides the basics of refinancing your home loan. However, this information is general in nature, so we always recommend you seek professional advice when making financial decisions.
- Find out how much you could save by refinancing
- Use uno’s refinance calculator to estimate your savings
- Speak to one of our home loan advisers: get in touch online, by phone or over email
Caroline Roberts and Clarissa Palisoc