Thanks to the internet, it is now easier than ever for people to shop around for a good deal on their home loan.
Unlike the ‘olden days’ when it seemed like borrowers were stuck with one lender for their entire loan term, it is now very common for people to refinance their mortgage with a different bank or lender.
Many borrowers are not even aware of what their current rate of interest is on their home loan, let alone whether it is competitive to what’s available in the market. But before you consider whether you should test the market, it is critical to know the ins and outs of refinancing your home loan to another lender.
Compare refinance home loans
Base criteria of: a $400,000 loan amount, variable, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. Introductory rate products were not considered for selection. Monthly repayments were calculated based on the selected products’ advertised rates, applied to a $400,000 loan with a 30-year loan term. Rates correct as at 16 January 2020. View disclaimer.
What is refinancing?
Refinancing is a term used to describe the changeover of a mortgage to a different organisation or account. It is often done when there are appealing benefits such as a lower interest rate, more flexible loan terms or debt consolidation requirements.
There are two main types of home loan refinance:
- When you move your loan to another financial lender, it is called an external refinance.
- When you refinance your home loan with your existing lender, it’s known as an internal refinance.
Like any financial product, refinancing does not suit every borrower. We have compiled a list of some of the pros and cons involved in refinancing your home loan.
Pros and cons of home loan refinancing
- Interest rate: one of the main reasons that people refinance is because they want a lower interest rate. Having a lower rate can not only reduce your monthly repayments but potentially help you pay your loan off sooner and boost your savings long term.
- Equity Access: when you refinance your home loan, you will have access to any equity you have paid over the course of your mortgage. If you choose, this could be used for things like re-investing, renovations, taking a holiday, purchasing a new car and much more. However, before you go spending too much of your equity, it’s important to remember that the more equity you have, the better chance you have of getting the very best interest rate you can achieve from your new lender.
- Flexibility: when you refinance your home loan, you can lengthen or shorten the loan term (i.e. how many years it takes to pay off the loan) to suit your needs. By increasing your loan term, you can reduce your regular payments over a longer period of time. In comparison, by decreasing your loan term, you may increase your payments but pay less interest overall (by paying off the loan quicker).
- Fees: It’s important to do your research before you consider refinancing as there can be a number of fees involved. A few of these include exit fees, valuation fees, application fees, and break fees.
- LMI: If your equity is less than 20% of the property value, your lender may require you to take out Lenders Mortgage Insurance (LMI). This protects the lender if you default on your home loan, but could end up putting you seriously out of pocket.
- Credit Score: 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.
It’s never too early
If you’re thinking about refinancing but have only just taken out a mortgage, it is still possible for you to do so. In fact, anecdotal evidence coming out of our sister company Loans.com.au’s lending specialist team suggests that it is not uncommon at all for people to refinance their home loans within 3 months of buying their property! This makes sense if you think about it. Buying a home for most people really focuses on just that – the home or property. Very rarely does it involve spending more time (than looking for the right home) on finding the right home loan!
Ultimately, refinancing is not going to suit every person in every situation. It is important to look at your individual circumstances and weigh up all of the pros and cons before making a move to do so.
Frequently asked questions
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.
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.
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.
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.
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.
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.
The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered which includes retail products from at least the big four banks, the top 10 customer-owned institutions and Australia’s larger non-banks:
- The big four banks are: ANZ, CBA, NAB and Westpac
- The top 10 customer-owned Institutions are the ten largest mutual banks, credit unions and building societies in Australia, ranked by assets under management in November 2019. They are (in descending order): Credit Union Australia, Newcastle Permanent, Heritage Bank, Peoples’ Choice Credit Union, Teachers Mutual Bank, Greater Bank, IMB Bank, Beyond Bank, Bank Australia and P&N Bank.
- The larger non-bank lenders are those who (in 2019) has more than $9 billion in Australian funded loans and advances. These groups are: Resimac, Pepper, Liberty and Firstmac.
Some providers' products may not be available in all states.
In the interests of full disclosure, Savings.com.au and loans.com.au are part of the Firstmac Group. To read about how Savings.com.au manages potential conflicts of interest, along with how we get paid, please click through onto the web site links.
*The Comparison rate is based on a $150,000 loan over 25 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate.
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