How to refinance a home loan in Australia

Refinancing your home loan to a new product or lender could help you find a loan that better suits your financial circumstances in a climate of rising interest rates, and may even save you a cash in the process.

Refinancing is the process of changing your home loan from one product to another, either with your existing lender or a new one.

A traditional home loan can often be up to 30 years long. During this time, your income, job and financial circumstances may change which may prompt you to consider refinancing. It can be, however, worthwhile regularly comparing home loans to see if you could be getting a better deal.

If you're ready to start comparing, we've included a few home loan offers to help you get started.

Refinancing your home loan might be something you consider if you’re looking for more wiggle room in the household budget, as it is often a major expense of the home. You might also refinance when interest rates are increasing or decreasing to see if you could find a more competitive interest rate on a home loan elsewhere, with the fees and features that suit your needs.

Some of the common reasons Australians consider refinancing include:

Lower interest rates

An interest rate is the cost a lender charges a customer for the benefit of lending them money. It is often considered one of the most compelling reasons to switch to a new home loan with the same lender, or a new lender, however not always the only one.

Lenders are competing to secure new customers, which means you may be able to take your current loan to a new lender to get a better rate.

When shopping around for a new home loan, it can be tempting to focus only on the interest rate. But rates that seem too good to be true may have hefty fees attached to them.

Some of the common home loan fees to look out for, and consider when you’re comparing loans, include:

• Establishment fees. Lenders may charge you an application or establishment fee. These fees are charged for the cost of setting up your loan. Lenders may also charge you a valuation fee to appraise your property’s value. These fees are important to note as you may have to pay them when switching lenders.
• Ongoing fees. There are two main ongoing fees a lender may charge. Loan service fees could be in the form of a monthly fee charged by your lender. Even if they are a small monthly charge, over the course of a 20-30 year mortgage, this could add thousands to your loan. Packaging fees are when a lender provides a group of financial and credit products like a home loan, credit card, online banking and share trading. They may charge an annual fee for each of these services, or one fee for the package.
• Discharge fees. Some lenders may charge fees for ending your loan, either when you pay it off or refinance to a new lender.

Changing home loans may allow you to access better or different features. Features like redraw facilities, extra repayments or offset accounts may help you pay off your loan faster and save more money.

Fixed rate home loans might allow you to lock in a more competitive interest rate or provide more repayment certainty for a few years, but may come with the downside of not allowing extra repayments, depending on the loan terms.

You may be able to access better features or more flexibility with a variable rate home loan in some cases. This decision is one you need to weigh up as a customer, and compare products to find one that suits you.

Debt consolidation is when you combine multiple debts (such as debt consolidation personal loans and credit cards) into one loan so you only have one repayment to remember. Consolidating these debts into one loan may also allow you to secure a lower interest rate than by paying them off individually.

Refinancing may allow you to combine other debt repayments with your home loan, making it easier to manage.

A key risk with debt consolidation is you may extend your repayments out longer than if you had kept the repayments as individual debts. By stretching it out you may end up paying more interest, so it’s best to do the sums and seek professional advice to figure out if it’s a suitable option for you.

Loan structure refers to the parts that make up a mortgage like the length of the loan, the interest rate, the features and the repayment schedule.

Loans that allow fortnightly repayments may help you reduce the interest paid over the life of the loan compared to monthly repayments. When considering refinancing, depending on your circumstances it may be worth review your payment structure.

Similarly, if your circumstances change, you may benefit from access to different features.

The general goal for an investment is for the value of the asset (in this case a property) to increase over time. For example, Tony bought a home five years ago for $500,000 with a 20 per cent deposit of $100,000, borrowing the remaining $400,000.

Today, the property is valued at $600,000, he has paid off $50,000 of his loan, and has $350,000 still owing to the lender. This means he now has $250,000 in equity. If Tony wanted to access this equity in order to buy an investment property, he could refinance to a new loan to have the property revalued and then potentially access the equity as a deposit for another property.

The goal of refinancing a home loan for many borrows is often to find a product that could save money while meeting their needs. Here are some benefits of refinancing:

Some lenders may offer incentives for customers to switch over to their product. These incentives can be in the form of cash back offers that pay you money to refinance your home loan to their product. In other cases, lenders may offer things like a frequent flyer point bonus to help convince you to move.

Of course, you need to research the product they are offering to make sure your loan provides the fees, interest rate and features you want.

Changing lenders or changing home loans may mean securing a lower interest rate. The lower the interest rate, the less you will pay in interest over the life of the loan.

If your initial home loan was a fixed rate loan, the interest rate will revert to a variable rate at the end of the fixed rate term.

The variable rate that your home loan will convert to may be higher than other home loan products on the market. By refinancing, you may be able to find a better rate than your current lender or product.

Conducting your own research, such as comparing a range of lenders and products, may help you negotiate a better interest rate with your current lender.

As your circumstances change, it may benefit you to change the length of your home loan. Refinancing can allow you to extend your loan term, reducing the amount you repay each fortnight/month.

Importantly, extending the loan term to reduce the size of your repayments could increase the total amount of interest you pay over the life of the loan, even at a lower interest rate. It could also have the effect of pushing out your home loan commitment beyond your income-earning years.

Conversely, if you want to pay off the loan sooner, you could reduce the total loan term and increase your fortnightly/monthly repayments.

Refinancing your home loan may cost you money, as there are often fees associated with the process. These costs need to be considered before you switch, but if you can save money over the course of your loan, it may be worthwhile in the long run.

Some common costs associated with refinancing include:

• Discharge fee — paid to your current lender for legal costs
• Break fee — your current lender may charge a fee for breaking your home loan early, depending on the terms of the loan agreement
• Application fee — this fee may be charged by your new lender for processing your new home loan application
• Valuation fee — paid to your new lender for the process of valuing your property, if required
• Registration fee — a fee for registering your property on the mortgage.

It’s important to remember you can also refinance to a new home loan with your existing lender. They may have a new or existing product that suits you better. In this case, you may be able to avoid paying some of the fees associated with refinancing.

The first step to refinancing is finding the loan you want to refinance to. This process can include comparing a range of home loans and considering fees, features, structure and interest rates, which can be time consuming.

Once you find a loan that suits you, you can apply for the home loan with the new lender. This step is just like applying for any home loan product. It will involve sending the lender personal and financial information so they can assess your ability to service the loan you are applying for.

You will then need to send your new lender information about the home loan you are exiting so they can see your repayment history, length of the loan, the outstanding loan amount and the property itself.

Exiting your home loan is typically the easiest part, as the new lender can contact your old lender to transfer documentation, and the property title. This is called the settlement stage, and many lenders may take care of this for you as they are gaining a new customer.

Keep in mind that it is common for lenders to require a minimum amount of equity in your property. This means if you are in the early stages of your home loan term, it may be more difficult to refinance, or there might be less options available.

The length of the refinancing process may be quicker if you’re staying with the same lender. However, if you are jumping ship to a new lender, it may take as long as a traditional home loan application process. This ultimately depends on the lenders, and how quickly process your exit.