Understanding home loan refinancing
What is home loan refinancing?
Refinancing your home loan means replacing your current loan with a new one---either from your current lender or a different credit provider. This process can help you secure a better interest rate, access new loan features, or reduce your monthly payments.
With the right help, switching loans can be a breeze. Get in touch to hear how the Felix Finance team can help you reach your financial goals with our home loan expertise, or read on to get a step by step guide.
As most lenders have minimum loan amount requirements for refinancing, it's important to check if your loan balance qualifies.
Benefits of refinancing your existing home loan
- Save money through lower interest rates and reduce your repayments
- Access equity in your own home for renovations, investments, or extra cash
- Explore debt consolidation options to combine multiple debts under one lender
- Switch between fixed rate and variable interest rate loan options (or combine them) to suit your financial situation
Why refinance your current mortgage?
Understanding why refinancing is the right move for you is essential. Common reasons include securing a lower initial interest rate, accessing better loan features than your old mortgage offers, or reducing financial pressure through more manageable repayment schedules.
How to refinance your current mortgage
- Get in touch with the Felix Finance team to understand your options in a few minutes, or
- Research and compare home loans and loan product options from different lenders
- Check your credit score and gather required documentation including bank statements
- Review loan contracts carefully, understanding terms and conditions, interest rate adjustments, and only period requirements
- Submit your loan application and prepare for a property valuation of your current property
Timing: understanding the impact of economic factors in refinancing
The economy significantly influences refinancing options. Interest rate trends, property market conditions, and lending policies all affect whether the benefits outweigh the costs of refinancing. Being aware of these factors helps you time your refinancing decision effectively.
Assessing your current situation
Reviewing your current lender and interest rate
- Compare your current interest rate with competitive offers from other credit providers - at Felix, we can help you compare thousands of loan options from over 40 leading lenders.
- Evaluate all fees and charges associated with your old loan
- Consider your remaining loan term and how it affects your total interest costs
Evaluating your current mortgage repayments
- Use a mortgage calculator (such as mortgage monster) to help you understand your current position.
- Calculate your total monthly payments, interest you're paying and scenario-plan different rate environments
- Determine how much of your loan principal you've already paid off
- Assess whether your current repayment schedule aligns with your financial goals
Considering the impact of lender's mortgage insurance
- Understand that if you've purchased above 80% LVR and you have paid LMI in the past, a refinance may be required to be paid again if your loan exceeds 80% of your property value
- Factor potential LMI costs into your refinancing calculations (from 1-5% of the home value)
- Ask Felix how you can avoid or reduce LMI when comparing different loan options
Identifying areas for improvement
When considering refinancing your home loan, it's essential to identify areas for improvement in your current loan. This can include high interest rates, unfavorable loan terms, or excessive fees. By understanding where your current loan falls short, you can make informed decisions about refinancing and choose a new loan that better meets your needs.
Some common areas for improvement in home loans include:
High repayments
There are ways to bring down your monthly repayments to help make your home loan affordable. Some of these options include extending the loan term, switching to interest-only periods, reducing the interest rate, or changing loan features.
High interest rates
If your current loan has a high interest rate, refinancing to a lower rate can save you thousands of dollars in interest over the life of the loan. Lower interest rates mean more of your monthly repayments go towards paying down the principal, helping you build equity faster.
Unfavourable loan terms
If your current loan has unfavourable terms, such as high fees, refinancing to a loan with more favourable terms can help you save money and pay off your loan faster. Look for loans with flexible repayment options, lower fees, and terms that align with your financial goals.
Excessive fees
If your current loan has excessive fees, such as high annual fees or redraw fees, refinancing to a loan with lower fees can help you save money and reduce your overall cost of borrowing. Compare different loan products to find one with minimal fees and charges.
By identifying areas for improvement in your current loan, you can make informed decisions about refinancing and choose a new loan that better meets your needs.
Reasons to refinance
Lowering your interest rate
- Even a small reduction in your interest rate can lead to significant savings over a period equal to your loan term
- Calculate the potential savings on your specific loan balance
- Consider the break-even point where savings outweigh the one off cost of refinancing
Reducing your mortgage repayments
- Refinancing can decrease your monthly financial burden through lower rates or extended terms
- Understand how changes to your loan term affect total interest paid
- Evaluate whether lower only payments align with your long-term financial strategy
Consolidating debts into your home loan
- Combine higher-interest debts (credit cards, personal loans) into your lower-rate new mortgage
- Consider the impact of debt consolidation on your overall financial position and loan balance
- Weigh the benefits of simplified repayments against potentially extending your debt timeline
Accessing equity in your home value
- Tap into your property's increased value for renovations, investments, or extra cash needs
- Understand how equity access affects your loan-to-value ratio
- Consider the long-term implications of increasing your loan balance
Preparing for refinancing
Checking your credit score
- Review your credit report before applying for refinancing
- Understand how your credit score affects your eligibility and interest rate offers
- Take steps to improve your score if necessary before submitting applications
Gathering required documentation
- Prepare personal identification documents, proof of income, and bank statements
- Collect recent statements from your current home loan
- Organise documentation for any other debts you plan to consolidate
Researching and comparing home loans
- Compare interest rates, fees, and loan features across multiple credit providers
- Consider both advertised rates and comparison rates when evaluating loan options
- Look for features that match your financial needs and goals
Exploring government programs and incentives for refinancing
Various government initiatives can make refinancing more affordable. These programs may include stamp duty concessions, first home owner grants (for initial purchases), and specialised refinancing options for those facing financial hardship.
Choosing the right refinance option
Fixed vs. variable interest rates
Fixed rate loans offer predictable payments but may have limited flexibility. When comparing a fixed rate loan, it's important to consider not just the interest rates but also the various fees and charges that can impact the overall affordability of the mortgage.
Variable interest rates can save money if rates decrease but introduce uncertainty
Consider split loans that combine both fixed and variable components
Interest-only vs. principal-and-interest loans
When refinancing your home loan, you may have the option to choose between an interest-only loan and a principal-and-interest loan. Understanding the differences between these two types of loans can help you make an informed decision about which one is right for you.
Interest-only loans
Interest-only loans allow you to pay only the interest on your loan for a set period, usually 1-5 years. This can help reduce your monthly repayments and free up more money in your budget for other expenses. However, at the end of the interest-only period, you will need to start making principal-and-interest repayments, which can increase your monthly repayments significantly.
Principal-and-interest loans
Principal-and-interest loans, on the other hand, require you to make repayments on both the interest and principal of your loan from the start. This can help you pay off your loan faster and reduce the amount of interest you pay over the life of the loan. However, your monthly repayments will be higher than with an interest-only loan.
Ultimately, the choice between an interest-only loan and a principal-and-interest loan depends on your individual financial situation and goals. It's essential to carefully consider your options and seek advice from a mortgage broker or financial advisor before making a decision.
Loan terms and repayment options
- Evaluate how different loan terms affect your monthly repayments and total interest costs
- Look for flexible repayment options like extra repayments, offset accounts, and redraw facilities
- Consider how these features align with your financial goals and cash flow needs
Considering the fees and charges
- Calculate all upfront costs including application fees, valuation fees, and break fees
- Factor in ongoing fees such as annual fees and other fees for account maintenance
- Determine whether the long-term savings outweigh costs involved in refinancing
Applying for a home loan refinance
Submitting your application
- Complete all required forms accurately and thoroughly
- Provide comprehensive supporting documentation
- Consider working with friendly lending specialists to help navigate the application process
Preparing for a property valuation/security assessment
- Ensure your current property is presented well for valuation
- Understand how the valuation affects your loan-to-value ratio
- Prepare information about recent comparable sales in your area
Receiving loan approval
- Review all loan terms and conditions before accepting
- Understand any conditions that must be met before final approval
- Seek clarification from a lending specialist on any aspects of the loan agreement you don't understand
Strategies for improving loan approval chances
Strengthen your refinancing application by:
- Maintaining a stable employment history
- Reducing existing debts before applying
- Saving consistently to demonstrate financial discipline
- Ensuring all financial information is accurate and up-to-date
Understanding refinancing fees and charges
Upfront fees and charges
- Budget for application fees, valuation fees, and discharge fees from your old loan
- Consider lenders offering rebates or waived one off cost options for refinancing
- Calculate how these costs involved affect your break-even point for refinancing
Ongoing fees and charges
- Compare annual fees, account keeping fees, and transaction charges
- Consider how these ongoing costs affect the overall value of the new loan
- Look for loans with minimal other fees to maximise your savings
Risk fees and lenders mortgage insurance
- Understand when LMI applies and how it's calculated
- Consider waiting until your loan-to-value ratio drops below 80% to avoid LMI
- Compare how different credit providers structure their LMI requirements
Managing the refinancing process
Working with a broker or lender
- Understand the benefits of using a lending specialist to access multiple loan options
- Consider direct lender relationships if you have specific requirements
- Ensure your broker or friendly lending specialists fully understand your financial goals
Tracking your progress and settlement
- Monitor each stage of the application and approval process
- Prepare for settlement by understanding all required steps and documentation
- Maintain communication with all parties involved in switching lenders
Refinancing with a new lender
Comparing lenders' interest rates and offers
- Look beyond advertised rates to understand the true cost of each loan product
- Consider lenders' reputations for customer service and support
- Evaluate special offers and incentives, but understand their long-term value
Evaluating key facts sheets and loan features
- Review standardised key facts sheets to make accurate comparisons
- Prioritise loan features that will provide the most benefit for your situation
- Consider how each credit provider's policies may affect you throughout the loan term
Special considerations
Refinancing with arrears or credit issues
- Understand how previous payment issues affect your refinancing options
- Consider specialist lenders who work with borrowers with credit challenges
- Be prepared for potentially higher interest rates or stricter terms
Refinancing to access equity in your home
- Calculate how much equity you can reasonably access from your own home
- Have a clear plan for using the released extra cash
- Consider the long-term implications of increasing your loan balance
Refinancing implications
Refinancing your home loan can have significant implications for your financial situation and credit score. It's essential to carefully consider these implications before making a decision.
Some potential implications of refinancing your home loan include:
- Impact on your credit score: Refinancing your home loan can affect your credit score, particularly if you apply for multiple loans or have a history of late payments. Each loan application can cause a hard inquiry on your credit report, which may temporarily lower your score.
- Tax implications: Refinancing your home loan can have tax implications, particularly if you're using the loan for investment purposes. It's important to consult with a tax advisor to understand how refinancing may affect your tax situation.
- Changes to your loan terms: Refinancing your home loan can cause changes to your loan terms, including the interest rate, loan term, and repayment schedule. It's crucial to review the new loan agreement carefully to ensure it meets your needs and financial goals.
- Fees and charges: Refinancing your home loan can involve fees and charges, including application fees, valuation fees, and discharge fees. These costs can add up, so it's important to factor them into your decision-making process and calculate the break-even point where the savings from refinancing outweigh the costs.
By understanding the potential implications of refinancing your home loan, you can make informed decisions and avoid any potential pitfalls.
Finalising your refinance
Settlement and loan completion
- Understand the settlement process and your responsibilities when switching loans
- Ensure your existing loan is properly closed and all accounts are transferred
- Verify that all agreed-upon terms are reflected in your new mortgage
Reviewing your new loan terms
- Carefully check all aspects of your new loan agreement
- Set up your repayment schedule and any automatic payments
- Understand how to access and use any new loan product features
Ensuring you're borrowing within your means
- Confirm that your new repayments fit comfortably within your budget
- Consider creating a buffer for interest rate increases if on a variable rate
- Develop a step by step guide to pay down your loan faster if your financial situation improves
