Both property investors and regular people who live in their homes refinance their home loans so they’re able to have a better mortgage situation. We get that it’s one of those things that can sound a bit complicated, though.
A refinance home loan is essentially just a new loan that replaces your existing mortgage. You could opt for a home refinance if you’re looking for a lower interest rate, or even just to access equity for other purposes. It could even be a matter of just wanting a loan with generally better features.
Throughout this article, we’ll break down:
- What refinancing is
- Why you might consider it
- How switching home loans works
- Key terms you should know about
What Is a Refinance Home Loan?
For anyone wondering what is refinance home loan exactly, it’s basically just when you take out a new loan so you can pay off your current mortgage. The main idea here is that your new one will have a lower rate or more suitable terms.
Some people call it a home refinance or simply just refinance house, but the general principle is the same: you’re getting a new deal on your mortgage to hopefully save money or better suit your needs. The new loan pays out the old loan, and you then make future repayments to the new lender.
How Home Equity Works
One of the main parts of refinancing is the equity in your home. Equity is the part of your property that you own outright – basically the difference between your home’s market value and the remaining loan balance.
For example, if your home is worth $700,000 and your mortgage balance is $400,000, you have $300,000 in equity. Most lenders want you to have at least 20% equity (meaning your loan to value ratio is 80% or less) to approve a refinance, unless you’re willing to pay lender’s mortgage insurance (LMI). This is just another cost you’re better off avoiding if possible.
Your loan-to-value ratio, or LVR, is simply the ratio of your loan amount to the property value. More equity means a lower (and safer) LVR, which not only avoids LMI but can even help you get a better rate. Lenders pay close attention to LVR, as this ratio LVR is a key factor in assessing your loan application.
Refinancing also lets you reconsider your loan type and features. You might switch from a variable interest rate loan to a fixed rate home loan so you’ve got a bit more certainty in your repayments (fixed rate home loans lock in your interest rate for a set period).
Or you might go the opposite way to get more flexibility. If you currently have a fixed rate period ending soon, it’s fairly common to start looking around – most people refinance when a fixed term is about to revert back to a higher variable rate.
Why Refinance Your Mortgage?
Not sure why to refinance your mortgage? See a few of the main benefits below:
Lower Interest Rate and Repayments
The most popular reason to refinance is so that you can get a lower rate. A reduced interest rate can mean smaller monthly repayments and significant savings over the life of the loan.
Cash-Back Offers
Some lenders offer a refinance home loan cash back promotion – essentially a cash bonus when you bring your mortgage over to them These deals might give you a few thousand dollars upfront. Be sure the new loan’s interest rate and fees are competitive, so that the cash back is actually a true gain and not just wiped out by a higher rate.
Access Your Home Equity
If you have built up equity, refinancing lets you tap into it. For instance, you might increase your loan amount to:
- Fund a renovation
- Buy another property
- Or even consolidate other debts
You’re “cashing out” some equity while refinancing – putting your home’s value to work for you.
Better Loan Products or Features
You might also refinance to get loan features that you don’t have with your current mortgage. For example, you could choose a new loan product that offers an offset transaction account (which helps reduce interest costs), or switch the type of loan – like from an interest-only loan to a principal-and-interest loan – to better suit your financial goals.
You might wonder, is it good to refinance your home every time? Not necessarily. If you’re already on a great rate and plan to sell soon (or would have high costs like break fees or LMI on a high LVR ratio), it might not save you money. Always weigh the costs vs savings – if the new deal doesn’t clearly put you ahead, staying with your current lender could be the smarter move.
Switching Home Loans: The Refinancing Process
Refinancing isn’t something you’ll just do on a whim since it requires a bit of planning. That said, it’s not that difficult – here’s an overview of how refinancing a home loan works in Australia:
- Review Your Current Loan and Goals
Start by checking your:
- Current interest rate
- Loan balance
- Features
- Possible exit fees
Then just think what it is you want from a new loan – maybe a lower rate or just specific features that your current loan doesn’t have.
- Compare Loan Options
Shop around (or consult a mortgage broker) to find a good deal. Compare interest rates, fees (like application or ongoing fees), and features across various loan products. If your existing lender is willing to negotiate, compare their retention loan offer to other lenders’ offers.
- Check Your Eligibility
Make sure you meet the new lender’s requirements. They will assess factors like your income and credit score, just like when you first got your mortgage. You’ll generally need a solid credit history and ideally at least 20% equity (an LVR of 80% or less) for the smoothest approval. The lender may arrange a fresh valuation of your property during this step.
- Apply for the New Loan
Once you’ve chosen a lender and loan product, submit your refinance application. You’ll need to provide documentation:
- Payslips
- Bank statements
- ID
- Details of your current loan
After the application, the new lender will process it and (if all looks good) approve your loan – often giving a conditional approval first, then final approval. You’ll then receive a formal contract or loan offer to sign.
- Settlement (Loan Switch) Day
After you sign the paperwork, the new lender works with your old lender to settle the refinance. On the settlement day, the new loan funds are used to pay off your old mortgage, closing it out, and your loan officially transfers to the new lender.
You’ll now make repayments to the new bank moving forward. The whole refinancing process usually takes a few weeks – often around 4-8 weeks (about 60 days) from application to settlement. Once settlement is complete, update your payments to the new lender – then enjoy your new loan’s benefits!
How Upscore Can Help
Ready to get started? Sign up for Upscore’s Finance Passport to simplify the refinance process and compare home loan offers from multiple lenders today. It’s free and could save you time and money.
