- What is refinancing?
- What is a refinancing home loan?
- When should you refinance?
- How to refinance your mortgage
- What if you have bad credit?
What happens when you refinance your mortgage?
Refinancing is the process of switching from your current home loan to a new one. There are a range of reasons for refinancing your home loan:
- You might want a better interest rate
- You’re sick of paying too much in ongoing fees
- You might want to switch between variable and fixed rates
- You want to access the equity in your home
- You want to access more beneficial features (such as offset accounts)
You only have to refinance what you haven’t paid off already. if you’d paid $100,000 on a $500,000 home loan, then you refinance $400,000 to a different home loan.
Switching home loans used to be a bonafide nightmare. Prior to 2011, lenders could charge exorbitant exit fees for customers who switched within a specified period, which discouraged people from refinancing despite being unhappy with their current loan. Fortunately, the Federal Government outlawed exit fees after that (except for loans written before 2011), making refinancing much easier.
What is a refinancing home loan?
There technically isn’t such a thing as a ‘refinancing home loan’. They are just home loans that you switch to. These loans don’t have to be from another provider – you can refinance your home loan to a different loan product with your existing lender too.
When refinancing, you don’t have to take on any extra debt – you can simply refinance the amount left to repay (the ‘principal’). For example, let’s say you’re five years into a $500,000 home loan, with $100,000 repaid so far. If you wanted to refinance to a more suitable loan that had, say, a 15-year loan term, an offset account and a lower mortgage rate, then you would only have to refinance the remaining $400,000.
Some Australians do take on extra debt when refinancing as a way of borrowing more money (e.g. to pay for renovations, a deposit on a second house etc.), which they do by utilising the equity they’ve built up in their house.
Refinance home loans
Rates as low as 3.03%
When should you refinance your home loan?
This is a question only you can really answer, as your living situation will be unique to everyone else’s. We can’t read your mind through the screen, as useful as that would be.
But, refinancing may be a good idea if you think you’re paying too much in interest on your home loan. You don’t have to quite be at mortgage stress levels (mortgage repayments making up 30% of your take-home pay) to be unhappy with your home loan, and keep in mind that even a slight reduction in interest rates, fees and features can make a noticeable difference to your budget.
However, it might NOT be worth refinancing if you:
- Have only just taken out the loan
- Have a loan with high refinancing costs
- Don’t have much time remaining on your loan term
- Your remaining principal is small
Essentially, if the costs of refinancing outweigh the potential savings or other benefits, it’s probably not worth it.
Process of refinancing a home loan
Luckily for you, you now live in a world where switching home loans with certain providers can be done almost entirely online and in a timely manner. You’d be hard pressed to find someone who actually enjoys the process of looking at their home loan and applying, it’s a pain!
If you’ve crunched those numbers and are ready to make the switch, follow these five steps:
- Assess your current home loan – it’s rate, fees, how much equity you have etc.
- Compare different home loans based on their rates, fees and loan terms
- Work out if there are any costs of refinancing (fixed loans may charge a break fee)
- Apply for your new home loan
- Have your loan approved and your house re-valued!
If a few years down the track after refinancing you think you can get an even better deal, you might consider refinancing again! When it comes to home loans, lenders need to earn your loyalty.
Refinance a mortgage with bad credit
Refinancing your home loan when you have bad credit can be hard, but not impossible. Here are some tips to help you get started:
- Talk to your current lender. See what options they might be able to offer you, before looking elsewhere.
- Have a look at your credit history. It will give you a clearer picture of how you look from the perspective of the lender.
- Wrangle your debt. To improve your chances of refinancing your home loan, the next step is to get on top of your existing debt.
- See a mortgage broker. Visiting a licensed mortgage broker could help because they may be able to point you in the direction of a lender who is more likely to take a look at your application (given your bad credit status).
- Consider a specialist lender. Specialist lenders will look over your credit history and may recognise that bad credit can sometimes be a result of circumstances outside of your control, like sickness or divorce.
- Borrow at an LVR of under 80%. Borrowing less than 80% of the property’s value may help you avoid paying Lender’s Mortgage Insurance (LMI), because the lender may consider you a lower risk.
Frequently asked questions
1. Do I need a deposit to refinance my home loan?
You generally do not need to pay a deposit when refinancing your home loan, but there are a range of fees you’ll probably have to pay. You may also have to pay for LMI if the value of your equity in the property (your initial deposit, plus the sum of your principal repayments so far and any capital gains) is less than 20% of the property’s value, or if you’re refinancing the loan to over 80% of the property’s value.
2. Does refinancing a home loan hurt your credit?
Most people don’t realise that every application for credit goes into their personal credit file. Refinancing your home loan often could impact your credit score which can make it difficult to receive lower interest rates for future applications.
3. How much equity do I need to refinance my house?
Many loans have a maximum LVR of 95%, which means you can’t borrow any more than 95% of the value of your home. If you want to refinance, this means you must have at least 5% equity in your property. When it comes to refinancing, a general rule of thumb is to have 20% equity in the property to avoid having to pay for LMI.
4. Is it expensive to refinance a mortgage?
Refinancing a mortgage can be costly, however, these costs can be recouped over time if you’re refinancing to a loan with a lower interest rate. The discharge fee will generally cost between $100-$400. The setup fees for the new loan can cost between $300-$1,000. A standard valuation fee alone can be between $200-$500.
5. How much can refinancing save me?
To work out what your monthly repayments might be and how much you could save by refinancing, you can use our home loan repayment calculator.
6. How do I know if I should refinance my mortgage?
You may want to refinance your mortgage for a range of reasons, including if you want to reduce your home loan interest rate, if you’re unhappy with your current lender, to consolidate debt, to fund a home renovation or extension, or to fund a big purchase (such as a car) at a lower interest rate.