Refinancing tips & tricks
When’s the last time you revisited your home loan to see if it’s still competitive? Chances are you may be signed up with an outdated mortgage with a high interest rate and not much flexibility.
The solution is to vote with your feet and move your home loan to greener pastures by refinancing your home loan.
So if this sounds like you, let our home loan refinancing guide show you the ropes:
What is refinancing?
Refinancing a home loan is when you move your mortgage across to a new lender that offers a home loan package with a more competitive interest rate and or more flexible features.
Scenario 1: Homeowners Lin and George have been with the same home loan provider for 15 years that currently offers a 5.5% interest rate. With $300,000 left to pay back on their home loan over the next 15 years, Lin and George decide to switch to a home loan with a lower rate of just 4%. This will save them $41,794 in interest and bring their monthly repayments down from $2,451 to $2,219.
Scenario 2: Sandra took out a home loan as a first home buyer 5 years ago. She now has $450,000 left to pay back over the next 20 years. While her current home loan’s interest rate is reasonably competitive at 4.5%, it’s a no frills type of mortgage without much flexibility. Now that Sandra is on a higher salary, she decides she can afford to pay $500 extra each month. Switching to another home loan with the same rate but that comes with an extra repayments facility will reduce the amount of interest Sandra pays over the next 20 years by $48,963 and will cut the life of the loan by 2 years and 7 months.
When shouldn’t I refinance?
While switching to a better home loan deal can save you big bucks, refinancing isn’t suited to everyone. Here’s when you shouldn’t switch:
If you have a loan to value ratio over 80%...Owning less than 20% of the property value may mean the cost of switching generally outweighs the savings made as you’ll have to pay lenders mortgage insurance again.
If you are signed up with a fixed rate loan...Refinancing during a fixed rate period could mean your provider will slap you with a high break cost fee, which may mean it’s better to wait until the fixed rate term comes to an end until you switch.
What should I consider when refinancing?
When you start your hunt for a new home loan deal, you’ll find the market is buzzing with varying home loan types. So take the time to choose a home loan that will work for you.
One of the major decisions you’ll need to make is what type of interest rate you’ll choose when you make the switch:
Fixed interest rate: If you want repayment certainty you could decide to lock in your interest rate with a fixed rate loan. But make sure you’re happy to stay with the home loan for the entire fixed rate term (usually 1-7 years) because if you refinance again during this period you could be charged a break cost fee.
Variable interest rate: This option is made for refinancers that are not only looking for a competitive rate but flexible features as well. For instance, an 100% offset account facility is usually only available with variable rate loans. The major downside of a variable rate loan is that your rate could change at any time, so you’ll need to ensure you budget for the chance of a rate rise.
Split rate loan: An option you could take when refinancing is mixing your home loan between both rate options, meaning a portion will be fixed giving you some rate security and a portion will be left variable allowing you to take advantage of flexible features like an offset account on that part of the loan.
You should also consider the features that will help you pay off your loan sooner. Here are some to put on your refinancing shopping list:
Extra repayments: As mentioned in the scenario of first home buyer Sandra, the feature of an extra repayments facility allows you to make additional payments on your home loan on top of your regular repayments, which could bring down the amount of interest you pay significantly, whilst also shortening the life of the loan.
Mortgage offset: Another way to bring down the interest you pay is by refinancing to a home loan that comes with an offset account. A mortgage offset is designed to replace your everyday transaction account, so you can set up your salary to be deposited into it and you’ll also receive a debit card that you can use for purchases and ATM withdrawals. The reason an offset account will reduce the amount of interest you pay is because the balance is offset daily against the home loan principal. So if you have an offset account with a balance of $40,000 and a mortgage of $500,000, you’ll only be charged interest on $460,000.
Flexible repayments: When you begin to search for a home loan worthy of refinancing to, you should look for one that allows you to choose your repayment schedule. A thrifty trick that you can use to pay off your home loan sooner is setting up your repayments fortnightly, rather than monthly. For instance, a monthly repayment of $3,000 will mean you’ve paid back $36,000 over a year, whereas a fortnightly repayment of $1,500 will mean you’ve paid off $39,000 - which is a month more over a year.
For more info on the features you should look for when refinancing your home loan, read our home loan features in a nutshell guide.
Will I be charged fees when refinancing?
Yes, that’s why it’s important to ensure the savings you are going to make through a better interest rate/lower fees and more flexible features are greater than any fees charged for refinancing.
Discharge fee: When you farewell your old provider, they may charge you a termination fee that can be anywhere between $0-$600. You may also be charged a break cost fee on top of the discharge fee if you’re moving from a fixed rate loan.
Application fee: When you apply for the new loan you may be charged an upfront fee from $0-$1,000. Although many providers will waive this if you’re a creditworthy borrower.
Registration fee: Another fee to budget for is the registration fee when you roll your mortgage over to the new provider, with the cost depending on the state you live in.
Valuation fee: The new lender may want to value your property and charge you a fee for a valuer coming out to your property.
Settlement/legal fee: Once the home loan is settled you could incur a fee at this stage.
What providers offer refinancing?
When you look for a new home loan to switch to the interest rate, features and fees aren’t the only things you should consider, as you should also check to see whether the provider is right for you.
Made up of the big four, CommBank, ANZ, NAB and Westpac, major banks also include providers like ING DIRECT, St. George, Bankwest and Suncorp (to name a few). These home loan providers have some drawcards but there are also some downsides of banking with a major. Here are some of the things to consider:
- Bundling. If you want to bundle products together like your credit card and home loan, a major bank may wipe the application fee and offer you a lower interest rate.
- Branch service. With a major bank you’ll have branch access and can speak to a bank manager about your home loan situation face to face.
- Higher rates and fees. Generally you’ll pay more for taking out a home loan with a big bank provider, as they need to cover their costs such as paying dividends back to shareholders through higher rates and fees.
Mutuals and credit unions
An alternative option is taking out a home loan with a mutual or credit union, which are run by members. Here are the major pros and cons of these smaller mortgage lenders:
- Pass profits back to members. As mutuals and credit unions are run entirely by members they are not driven to pass profits back to shareholders but instead stand by the philosophy of returning profits to members (e.g customers like you) in the form of better interest rates and lower fees.
- Need to become a member. To refinance to a home loan with a mutual or credit union, you’ll need to pay a small membership fee.
Online only players
There are also a range of online only lenders that have come into the market in recent years as challenger brands to the major banks. Here are some of the pros and cons of online only players:
- Competitive headline rates. If you want a super low rate then you should definitely check out the home loan offerings from the online only players, as that’s where the best rates in the market are usually found.
- No branch access. Run entirely online means you won’t have access to a bank manager and will need to be comfortable with managing your home loan over the phone or online.
Home loan refinancing steps
Once you’ve got a clear idea of the type of home loan and the type of provider you would like to refinance to, kick off your home loan search by following these quick steps:
Step 1. Head on over to our Switch & Save Calculator: This handy tool compares over 100 home loans in our database that are available now.
Step 2. Fill out your details. Next up, enter all your current property/home loan info from the loan amount to the property value and click “get results”.
Step 3. Compare home loan deals. Once you have completed the above two steps, our calculator will take you to our home loan comparison page, which will show you some of the top home loan deals available for your situation and the savings you’ll make by switching.
Step 4. Create a shortlist. Select a few that you like and compare them side by side looking at the interest rate, comparison rate, fees and features. You can click on the ‘more info’ text at the bottom of each product for additional information.
Step 5. Start your application. Once you’ve found a home loan that ticks the boxes for you, you can kick off your refinancing application by clicking on the ‘go to site’ button. This is located to the right of the product information. And you’ll be on your way to great savings.