Refinancing your home loan can save you thousands
of dollars in mortgage repayments and will give you the
opportunity to create instant equity for the purpose of:
- Property Investment
- Consolidating existing debts
- Funding renovations
- Access to better deals and rates
This blog will demonstrate in a step-by-step
guide how to refinance your home loan in
order to take advantage of immediate equity
and better home loan rates.
What is Refinancing?
Refinancing your home loan is simply renegotiating your home loan either with your exisiting lender or with a new lender. This is typically carried out in order to take advantage of a longer loan term, lower interest rates or to access equity for many purposes.
The 9 Key steps:
Step 1: Will I benefit?
Firstly it’s important to work out if it’s beneficial to refinance, in order to do so we must work out the potential costs involved theses can include:
- Exit fees and other penalties from your current lender
- Fees in setting up a new loan
- Legal fees
- Valuation fees (can be up to $700 per valuation)
- Stamp duty on your mortgage
The new rate must be enough to offset these costs, to achieve an advantage. However, the home loan market can be a highly competitive one, so be sure to tell your current lender that you’re wanting to refinance first and its possible that they will come back to you with a discounted rate or a more competitive offer.
Its also important to work out why you want to refinance, ask yourself what am I going to achieve and am I in a financial position to do so? Some key things to ask yourself are:
- What is my current mortgage balance?
- What is my current financial position? (Earnings vs. spending)
- What interest rate am I paying vs. what’s the best interest rate I can find?
- What is the term of the loan? (Time to pay back)
- Bank fees I’m being currently charged?
Most of this information can be found in your mortgage documentation and it is important to have all of the information ready for when you put in your application.
Step 2: Research
Now its time to find the best possible home loan, you can create a list of the features that you need in the loan to help with selection. It can be a good idea to see a mortgage broker to discuss options and they will also help you to compare possible loans, however mortgage brokers are not always free, so make sure you are aware of any fees. There are also many websites that will do the comparing for you; this will be helpful in the initial stages of research.
Next work out how you’re going to structure your mortgage, there are many options that the banks will offer these days including:
- Line of credit/equity line:
A line of credit is similar to having a large chequebook, with interest accumulating on the balance. A line of credit is an approved limit of borrowings that you can use a piece-at-a-time, or all at once.
- Linked to an offset account:
The combined balances of a credit account and a debt account offset each other to keep the interest calculated at a minimum.
- Interest only:
You repay only the interest on the amount borrowed usually for the first one to five years of the loan, though some lenders will offer longer terms. This means monthly repayments are lower. Interest only is popular with investors who plan to pay off the principal when the property is sold, having achieved capital growth.
- Split or combination loan:
With these you fix part of your mortgage and leave the rest as variable. You can even go so far as to have several fixed rates for several parts of the loan and one variable rate for the rest. This is good because it offers both security and flexibility.
- Transactional mortgage:
You can pay money into it (including your salary) and take money out of it very easily. However, for some of us such easy access to so much money can be dangerous.
- Standard variable rate loans:
Standard variable loans are the most common home loan in Australia. Interest rates go up and down over the life off the loan depending on the rate set by the RBA. Your regular repayments pay off both the interest and some of the principal.
- Basic variable rate loan:
Usually offers the lowest interest rate but has fewer loan features, such as a redraw facility and repayment flexibility.
- Fixed rate loans:
Opposite to variable loans where the interest rate changes with the decisions of the RBA, a fixed rate loan has a fixed interest rate. Great if interest rates go up, but not so great if rates go down.
- Low Doc:
Popular with self-employed people, these loans require less documentation or proof of income than most, but often carry higher interest rates or require a larger deposit because of the perceived higher lender risk.
Choosing the type of loan will depend on your personal preference and your financial position. Remember knowledge is power when it comes to your money, so research is imperative.
Step 3: Valuation
Your new lender will need a valuation of the property, valuations can be expensive and will often analyse things such as the property’s appearance, real estate around you and what prices houses in your area are selling for. Bank valuations can be more conservative as you will be borrowing funds from them, so it’s a good idea to source this through an external party.
Step 4: Application Time
Now that you have picked a suitable home loan and have valued your property, it is time to submit the application to your preferred lender. The process should be very similar to the first time you applied for your finance unless:
- You’re going to refinance with the same bank (in this case there will be less paperwork)
- Your credit record has changed
- Your income has changed
- Your liabilities have changed
- You don’t have equity in your property
If your going through a mortgage broker they will submit the application for you as part of the service.
Step 5: Communicate
Be sure to notify your current lender that you are refinancing to a new provider, they can then forward the required information to your new loan provider. Also let your current home insurer know that you have changed the name of the interested party over to a new bank (if changing banks).
Step 6: The waiting game
It may take anywhere from a few days to a couple of weeks for your new lender to process your refinance application.
Step 7: Approval
Once the loan has been approved, you will be advised by the lender in writing, this is called unconditional or formal finance approval. Your broker or lender will then have a solicitor prepare the loan documentation for them. It’s important to run this through your own solicitor to make sure you agree to and understand all of the terms and conditions, as once finalised, the agreement will become a legally binding document.
Step 8: Sign on the dotted line
Once a solicitor has reviewed the paperwork, they’ll be handed back to you to sign. Although they can be very comprehensive, its really important to pay close attention and take the time to read it, so that you understand the specific details of the agreement.
You may also be required to sign discharge documents, this is a formal notification to your old bank that the loan is being refinanced to another lender and that you want them to discharge the mortgage over the property’s title. This will need to be signed and sent back to the original bank you held the loan with.
Step 9: Settlement dates
It will be your new lenders responsibility to arrange the settlement of your previous loan and the establishment of your new one. You now have a brand new loan and if your research was correct, you should be in a better position in the coming years for making the decision to refinance.
As each individual situation is different, this guide will help you to weigh up the pros and cons before refinancing your home loan, to ensure that you can achieve a successful outcome.