Thinking about refinancing your mortgage? Refinancing a home loan is a decision every homeowner should consider, especially when changes in the lending market happen all the time.
Data by RBA shows that current borrowers are paying higher interest rates than new borrowers. Banks and lenders usually do this to attract new customers – which is why it’s important to periodically review your home loan.
You don’t have to – and shouldn’t – be stuck in a decades-long mortgage without making any changes. People’s goals and financial situations change, and refinancing could give you potential benefits. Maybe you’re looking for specific features such as redraw facilities, or perhaps you want to renovate your home and want to leverage your home equity for it.
Let’s look at why refinancing a loan can be a good idea – and what you should also factor in.
What is refinancing a home loan?
Home loan refinancing can be defined as switching home loans. With refinancing, you’re paying out your current mortgage by taking out a new loan. You can do this with your current lender, or by choosing another.
Refinancing can be a clever way to save money and shorten loan repayments terms. And with interest rates rising all the time, refinancing can make a big difference in reducing your monthly repayments, whether you’re cash-strapped or not.
Benefits of refinancing
Australians choose to refinance for a number of reasons, but the main benefits of this approach are:
- Get a lower rate
- Consolidate debt
- Access home equity
- Switch between rates
- Get a cashback deal
- Get better loan rates
1. Refinance at a lower rate – use Loanscope’s Refinance savings calculator
As mentioned above, banks and lenders tend to become complacent and take their existing borrowers for granted. Upon inspection, you might find a more competitive rate that saves you money in the long run and reduces the size of your mortgage. Check out the refinance home loan calculator to see if you can cut your repayments and save.
2. Plan to consolidated debt with the Extra repayment calculator
Refinancing also gives you the benefit of consolidating all your debts into one. Home loans, car loans, credit card debts and other personal loans result in having to make different repayments. By consolidating your debt you’ll most likely reduce the overall interest you’re paying. Just keep in mind that this comes with a few downsides such as turning short term debts into a long term one. To benefit from debt consolidation, you should plan for additional repayments. Check out our extra repayment calculator to find out how this might look for you.
3. Access home equity to refinance
Your home is probably one of your most valuable assets. Home equity is defined as the current market value of the property you own minus what you owe. You can access your home equity and use it for home renovation loans, or to buy or build an investment property. Or maybe you want to release the funds and use them for other personal expenses.
4. Switch between fixed and variable rate mortgages
Depending on your current circumstances, you might want to switch to a predictable repayment by switching to a fixed rate. Or you might want to take a risk and profit from a lower variable rate. And, if your loan has an offset account feature (see more below), you can find the best combination of fixed and variable rates. Just use our split loans calculator.
5. Refinance cashback
Cashback offers are when a lender gives you extra perks for a home loan or refinancing. These perks are usually cash and can be a direct deposit or a deduction from your mortgage.
“At the moment, some lenders offer cashback which not only covers the cost of switching, but would also leave some change. For example, Citibank currently offers between $3,000 and $6,000 cashback until the end of September 2022,” advises Emmanuel Guignard, Senior Mortgage Broker and Director at Loanscope.
6. Get better loan features
Different banks and lenders come with different loan features – which you might want to access. The four main loan features you could access when refinancing your mortgage are:
- Redraw facility: allows you to withdraw any extra payments you’ve made on your loan. So if you’ve been wondering if you get money when you refinance a loan, the answer is yes. And how long after refinance do you get money? It generally takes between 3 to 60 days.
- Offset account: a transaction or savings account linked to your home loan that helps you save money on the interest you owe on your mortgage.
- Repayment holiday: a break from repayments in case of life events when you might need the money for something else (career break, maternity leave).
- Flexible repayments: extra payments cost-free so you can pay your mortgage sooner.
Thanks to these benefits of refinancing, Australians are changing their loans more than ever before. According to data released by The Australian Bureau of Statistics in 2021, borrower refinancing of home loans reached a peak of $17.2 billion.
Borrower refinancing July 2003-July 2021. Source: ABS
But what are the costs involved in refinancing your home loan?
How do I know if it’s worth it to refinance my house?
Refinancing is not free. It’s important to note that refinancing might not be for you. It’s important to look at the big picture and take into account the upfront and ongoing costs associated with refinancing. Do the benefits outweigh the costs? These are not just philosophical questions you need to answer, but specific financial ones.
Depending on your circumstances, refinancing costs may include:
- Break costs and exit fees – both dependent on your contract. Best to speak to your refinance mortgage broker if you are refinancing loans that request these fees.
- Borrowing costs – these may include settlement fees, loan establishment fees or valuation fees.
- Stamp duty and fees – this depends on the state you live in. You could also incur a Mortgage Registration Fee payment.
Does refinancing cost more in the long run? For some, it can. This is why it’s important to look at the bigger picture and understand what refinancing means for your budget long term.
What is the step by step process for refinancing a home?
If you’re ready to refinance your home, we’ve outlined some steps to get you started.
- Assess your situation. Why do you want to refinance? Is making the switch the right decision for you? And make sure to think about questions like: does refinancing hurt your score? Generally, not, but if you have multiple loans declined, it could lead to a bad credit score.
- Compare home loans. You need to look at more than interest rates. Fees and charges all add up, and you also want to make sure your desired features are included.
- Assess your financial situation. Do you have borrowing power? It’s important to understand how much you can afford so that refinancing helps you save money instead of the opposite.
- Apply for the home loan.
Are you ready to refinance your mortgage?
There are many advantages to refinancing, but it doesn’t mean that it’s the right decision for you right now. Let our experienced mortgage brokers help you. We’ll work out your borrowing capacity and equity position, navigate the complex paperwork required and ensure you have access to much better offers and variable rates.
With Loanscope, refinancing a house doesn’t have to be hard. Contact us today.
Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.