Perhaps you’ve put it off in the past, but as interest rates rise, you may be considering a home loan refinance.
Put simply, refinance is switching your home loan for a deal that better suits you, and here’s how.
We’ve written before on home loan refinance, but more so now than ever, reducing the cost of your home loan and getting the best possible deal is on a lot of people’s minds.
Recent rises in interest rates across the majority of the banking sector, combined with rising inflation and cost of living pressures on household budgets have many exploring the market looking to refinance, or switch home loan providers.
But there’s more reasons for refinancing your home loan than just getting a better deal. You could be looking to borrow more on top of your existing home loan to complete some renovations, or you may want to fix your loan or change your loan product setup to match your financial circumstances at a given point in time.
What is refinancing?
To refinance means to change or replace the terms of an existing credit agreement.
Refinance, sometimes known as refi or simply switching loans is usually used in the context of home loans, as this represents the largest debt obligation many of us take on in our lifetimes.
The changes sought by the borrower may relate to their current interest rate, repayment amount/schedule, or any other conditions outlined in their loan contract.
A refinance can be something that a borrower is able to negotiate through with their current lender, or borrowers may be able to negotiate a home loan with conditions that better suit their needs with a new lender.
Most commonly, refinancing takes place in an environment where interest rates are fluctuating either up or down, as borrowers look to make the most of competition and secure the loan setup that’s most favourable to them.
Greater Bank
Refinancing benefits
Just like with any other debt or purchase we make, your home loan should provide the best deal to suit your needs. Being such a large debt obligation, there is even more importance on getting it right.
While it may represent some leg work on your behalf, there are a number of commonly held benefits of refinance worth considering:
Saving money
Did you know that one third of Australians are financially illiterate?
This alone may make the prospect of refinancing worth exploring for many, especially if you haven’t closely examined your interest rate and repayment amount in detail in some time.
You may find that, with market conditions beginning to change, a better deal is possible.
For example, take a look at how we stack up against some of our Major Bank competitors – as you can see, it’s possible to save some serious coin in the long run.
Refinancing to fixed or variable
Often, borrowers may look to refinance to change their current loan product to a fixed or variable rate.
During times when fixed rates are low, it’s understandable that locking in a great rate, with a predictable repayment amount in the medium-term would be attractive.
Similarly, if fixed interest rates are going up, borrowers may look to take their chances with a lower variable rate.
Be aware, however, that if you are looking to switch from fixed to variable, you may face any break-costs that your lender imposes – these will be stipulated in your loan contract.
Access to funds
If you’re faced with a pressing financial need, without considerable savings to dip into, and without access to other forms of credit, refinancing your home loan by borrowing extra on top of your existing balance might prove useful.
If you’re looking to renovate your home, whether urgently or not, borrowing these extra funds through your home loan gives you access to the funds you need while maintaining one simple interest rate and repayment amount going forward.
Pay off your loan sooner
If you’ve realised that you’re able to make extra repayments on top of what your existing minimum repayment requires, you can refinance your home loan to reduce the term (number of years).
The reason borrowers would consider this option is that doing so gives you the chance to save considerable money, reducing the overall interest paid over the life of the loan.
Refinancing considerations
If refinancing is something you’ve been weighing up, it’s important to get the facts on just what it may involve, and what it may mean for you as a borrower.
Here are some things worth considering before you jump at the chance to refinance your home loan:
Loan term reset
Whether you’re thinking about refinancing with your current lender or a new one, ask your lender whether your loan term will reset to its original length.
For example, if you are 7 years through paying off a 30 year mortgage, will your new loan reset to a 30 year term?
If so, do the maths to make sure the savings you’ll make at a lower rate outweigh the total interest payment over the life of the loan.
To fix or not to fix
If you’re able to take advantage of a great low fixed rate and refinance, happy days, right?
Well, yes – except if interest rates continue to drop and you develop severe borrower FOMO.
Once you’ve locked in your fixed rate, the only way you’ll be able to take advantage of further interest rate drops is by refinancing again, and this will involve break costs.
Your credit score
By refinancing, you may notice a slight dip in your credit score.
Usually, this is nothing too drastic, and in most cases will correct itself relatively quickly, but it’s something to be aware of.
On the whole, most borrowers refinance to reduce their overall debt amount, and repayment amount, which is something looked favourably upon by lenders anyway.
Types of refinancing
There are plenty of home loan refinance options available. Here are some of the top-level refinance products you’ll commonly find, and who might be interested in them.
- ‘Basic’ home loans – A basic loan refers to a loan with less features, but usually with a lower interest rate. Borrowers who want to lower their rate and save typically consider these loans.
- Offset – Borrowers with significant savings and no-where decent to park it consider loans which offer offset accounts. Storing money in offset allows you to reduce the loan amount on which your interest is calculated, potentially saving money.
- Package loan – a loan which couples different financial products together with a home loan. Sometimes can offer a special lower rate to increase appeal. A package fee may apply, however, so take this into account when looking to calculate any future savings.
- Line of Credit – if you have built up equity in your home, you may be able to refinance with a line of credit. With interest only calculated on any money you draw down from your line of credit, this option may be useful for those who need on demand access to funds for things like renovations.
- Fast Refinance – FASTRefi®, as it is sometimes called, does what it says on the tin. It allows for quick refinancing when an in person valuation may not be possible. These refi’s can usually be done in under two weeks, but this is not something offered by all lenders. At Greater Bank, we offer FASTRefi, meaning you may be able to switch your loan without ever having to speak with your current lender again…
Refinancing fees and costs
Before making the move on your home loan refinance, it’s worth examining the detail of your current loan contract, as you may be faced with some fees and costs that give reason for pause. Some may include:
- Early exit fees – If you took out your home loan before 1 July, 2011, your home loan may include an early exit fee. Outlawed for loans taken out after this date, these can sometimes run into the thousands of dollars.
- Break fees – if you’re currently on a fixed interest rate for a fixed term, refinancing may incur break costs. These are paid to compensate the lender for your home loan not running for the fixed term.
- Application or establishment fees – These fees cover the processing and documentation of a new mortgage, but be aware that many lenders will waive these to attract new customers. These fees can be anywhere up to $700.
- Lenders mortgage insurance (LMI) – Borrowers are asked to pay LMI when they borrow more than 80% of a property’s value. LMI can run into tens of thousands of dollars, so take this into consideration and do your maths before you refinance.
- Property valuation fee – Before settling on a loan, a lender will typically require a property to be valued. These fees can vary based on your chosen lender, and your property’s location.
- Settlement fee – A fee paid to your new lender to settle your loan. These fees cover the cost of the lender arranging the loan settlement.
Steps to getting a refinance
Firstly, it’s normal to be considering a refinance in any environment where interest rates are fluctuating.
Getting the best deal on your home loan is as important as any other budgeting decision we make.
You owe it to yourself, however, to take everything we’ve discussed here into consideration and work out whether any potential refinance will help you meet your end goals.
At Greater Bank, our expert lenders don’t work on commission, and are committed to helping our customers reach their financial goals.
To start a conversation with one of our lenders about your refinance considerations, simply make a home loan enquiry online today.
FASTRefi® is a registered trademark of First American Title Insurance Company of Australia Pty Limited ABN 64 075 279 908.
This article is intended to provide general information of an educational nature only. This information has been prepared without taking into account your objectives, financial situation or needs. Therefore, before acting on this information, you should consider its appropriateness having regard to these matters and the product terms and conditions. Terms, conditions, fees, charges and credit criteria apply. We do not recommend any third party products or services and we are not liable in relation to them. Any links to third party websites are for your information only and we do not endorse their content. Information in this article is current as at the date of publication.