A guide to Home Loan Refinancing

Family enjoying their new home Family enjoying their new home

Home loans are one of the biggest financial commitments most Aussies ever make. As life changes however, so do our needs. That’s why it makes sense to check in on your home loan and ensure it’s still working for you.

Rising home loan interest rates and inflation in Australia have made it necessary for borrowers to explore all their financial options. Many are considering refinancing their home loans in order to reduce their monthly expenses.  If you think it might be time for a change, there is an opportunity to improve your financial situation by switching products or lenders, you might want to  think about refinancing.

Why do you want to refinance?

This could quite literally be the million-dollar question. It’s important you have a clear view of the motivation and reason for refinancing a home loan before beginning the process or switching lenders. 

There are many reasons someone might refinance their home loan. Perhaps you need a bit of extra cash to finance a much-needed renovation, or you’ve seen some enticing offers advertised and feel like you might be missing out.

Depending on the product you choose, refinancing your home loan could help you save on mortgage repayments, access the equity accrued in your property or consolidate debts. 

There are several online tools available to help you decide if it’s the right decision to refinance your home loan. For example, the mortgage switching calculator on moneysmart.gov.au. 

But before switching products or lenders, here are five questions to ask yourself first:

What is the reason you want to refinance

What is the reason you want to refinance?

It’s important to have a clear view of the reasons why you want to refinance your home loan before you start. Is it to finance an investment property, consolidate other debts or release equity to undertake renovations?

Or is there simply a product out there that might better meet your needs? Have a clear understanding of your personal motivation, research widely to find loans with the features you’re looking for, and make sure you read the T&Cs of the products you’re considering - some may have restrictions on the use of certain features e.g. ‘cash out’.
How much can I afford to borrow

How much can I afford to borrow?

Start by working out how much you need for whatever your reason for refinancing is, remembering you need to be able to pay it all back comfortably. Next, gather some information on your regular income, expenses, and how much equity you’ve got in your current property.

Using a borrowing power calculator, you can work out:

  • Whether refinancing is an option for you;
  • If it is, your maximum borrowing capacity; and
  • What your new monthly repayments might be.

This could be handy to re-visit if your income has changed significantly since you took out your initial mortgage.

How much money could I save over the life of my home loan

How much money could I save over the life of my home loan?

Once you know how much you can and want to borrow and you’ve got a few products in mind that meet your needs, use a repayments calculator to check the impact of the associated interest rate and loan term. Keep in mind though that these calculators provide an estimate only, and generally do not take account of all fees and charges associated with the loan. Ensure you refer to the comparison rate of any loan product you review for a clearer indication of the true cost of a loan.

Using a repayments calculator will also help you check the impact of extending the life of your loan, if that is something you’re considering.

Consolidate other debts into this loan

Do I want to consolidate other debts into this loan?

Consolidating outstanding loans could be a good way to save on interest, as having to pay multiple (often higher) interest rates can really add up. It could also reduce the number of monthly repayments, which can make making repayments on time easier to manage. Make sure you read all your existing loan information to make sure you know and factor in any break costs for the loans you’re thinking of consolidating.

A word of caution though – if you have a large credit card debt, remember that refinancing isn't a magic way to ‘fix’ your spending habits.

Upfront and ongoing home loan fees

What are the upfront and ongoing fees?

It’s always critical to double-check the fine print before signing anything. Make sure you understand all the fees for refinancing your home loan, and check whether they need to be paid upfront, or will be deducted monthly or annually with your repayments.

Whilst the comparison rate can help give you a clearer picture of the true cost of getting a loan, it’s important you consider there could be other fees associated with refinancing, as well as potential discharge or break fee on your old loan.

Having answered all of the above, weigh up all the factors concerning the loan you were considering refinancing to, and make an informed decision - will refinancing help you reach your goals?

What are the benefits of home loan refinancing?

Depending on your financial goals, there are potential benefits that can make refinancing seem like an enticing option. Refinancing might be an option for people who:

get smaler debts under control
Want to get smaller debts under control 
(such as a car loan or credit card balance) by consolidating into a single loan. This could help you save on multiple loan admin fees, and will mean you’ve only got to keep track of one repayment. Learn more about the benefits of debt consolidation through refinancing.
Lower interest rate
Have found a lower interest rate
and have reviewed the comparison rate against their existing rate, as well as considering any break fees or other costs associated with switching loans. Even a 0.5% reduction could save a significant impact over the life of the loan – but make sure you’re looking at all the information so you can make an informed decision that will meet your needs.
Use equity
Want to use their equity 
to finance an investment property or renovations. Depending on your overall financial situation, this could potentially be used to finance an investment property, or even finance some overdue home renovations. You’ll also continue to just make the one loan repayment. But remember, it’s important to  create a renovation budget before booking the tradies in. Find out more about using the equity in your home.
Home loan features
Want to access loan features 
to better meet your needs. An offset sub-account or a variant of this (the name and offering may differ between lenders) might help if you have any funds accumulated, as these can be placed in this account to help  reduce the daily interest calculated on an outstanding loan balance. Different lenders and loan products may also offer different repayment options, or things like a direct line of contact for more support and customer service.

Steps to refinance your home loan

Step 1. Do your research – review and compare home loans

It’s likely you’ve started thinking about refinancing after seeing an ad for an attractive looking home loan interest rate – but make sure you have thoroughly researched what’s on offer, and look at a few others to compare. It’s important to understand things like upfront and ongoing fees and charges, the features of the loan, and the comparison rate. The comparison rate will help give you a clearer indication of the true cost of a loan, as it includes the interest rate, and most fees and charges relating to a loan, reduced to a single percentage figure – use this to compare home loan comparison rates during your research period.

There could also be key features you want included in the new loan - like an offset sub-account - so be sure to compare home loans online and work out which option works for you.

Step 2. Gather all the documentation you might need

When you approach a lender, they will need you to provide documentation for things like income, accounts, etc. Starting the process with all financial documents in order can make the rest of the process easier.

  • Gather recent pay slips or proof of income, bank statements, credit card and loan statements, to work out monthly expenses.
  • Make a note of current loan repayments, interest rates (including comparison rates), ongoing fees, and any discharge fees or break costs.
  • Now that you have an idea of how much you need to borrow, work out how much you can borrow – use our borrowing power calculator, or talk with a lending specialist to talk through what you need, and what you can afford.

Step 3. Talk to your shortlisted lenders or broker

After finding the mortgage that ticks all the boxes, it’s then time to apply for a home loan. This can be done with the help of a mortgage broker or directly via the lender; depending on the broker or lender chosen, either in-person, over the phone or online. This will require the same type of information as applying for a new mortgage such as property details and income and expenses, as well as details of the existing loan.

The lender may provide conditional approval while they do some further checks – this should be provided to you with all conditions clearly listed. These conditions will depend on your unique circumstances, but might include things like a property valuation or the provision of pay slips. After this, a formal loan approval can be provided.

Step 4. Make sure you understand the loan documents before signing

It’s important to read the loan agreement carefully and ensure that all terms and conditions are clear to you.

Top tips:

  • Never be afraid to ask for clarification on contract terms or clauses – it’s important you’re comfortable with what you’re signing, because this is a big decision.
  • Don’t feel pressured to sign anything you don’t agree to – if you decide you are not comfortable with the terms of the loan documents or are not satisfied with the assistance provided by the broker/lender, you are allowed to walk away.

Step 5. Settlement

The new lender will confirm the settlement date, which is the date the mortgage officially switches from one lender to another, or to a new product if staying with the same lender.

 

3 tips to help find the right interest rate for you

1.
Shop around to compare different interest rates

One possible reason to refinance is to secure a lower interest rate which could help reduce your monthly mortgage payments in certain circumstances. A good place to start is to research reputable lenders who offer competitive rates. Then compare the interest rates, comparison rates, loan terms, and customer reviews before deciding if the loan is right for you.

Before jumping to another lender, you may want to consider negotiating with your current loan provider – it's possible that they’ll be willing to offer a lower rate to retain your business, especially if you have a consistent repayment history.  

2.
Look for a loan that meets your needs 

There’s more to a home loan than the interest rate. It could be a good idea to keep the following in mind when deciding if a home loan option is right for your situation: 

  • Loan term: Decide whether a shorter or longer loan term suits your situation better based on your financial goals. It’s possible that choosing a shorter term could enable you to pay off your home loan faster, but the monthly payments may be higher. 
  • Extra features: Look into the additional features offered by the lenders, such as redraw facilities, offset accounts, and the ability to make additional repayments. These features could provide flexibility and may help you save on interest payments in some situations.  

3.
Avoid loans with unnecessarily high fees by doing the following: 

  • Reading the fine print: Thoroughly review the loan terms to understand all the costs and fees involved with refinancing
  • Calculate the break-even point: Determine how long it will take for the savings from the new interest rate to recuperate the refinancing costs. If it takes too long, it might not be the right decision for your situation. 
  • Negotiate: Once you've settled on a lender, consider negotiating any excessive fees. Potential new lenders may be willing to accommodate your requests, especially if you have a strong credit profile and can demonstrate your loyalty.

    

Tips for home loan refinancing

Consider your up-front charges

Consider your up-front charges

TThere are usually fees associated with refinancing, as well as (in some cases) home loan break costs to pay out an old mortgage early.

  • Loan application (or establishment) fee – a one-off cost to set up the new home loan
  • Valuation fee – to cover a professional property valuation
  • Title protection fee – covers the lender for property fraud and other risks during the title transfer period
  • Settlement fee – covers administrative costs involved with settling the loan
  • Discharge, break, or exit fees – previous lender may charge this. Make sure you read the loan contract you signed with your previous lender so you’re across any such fees you might have to pay
  • Government fees – such as stamp duty or mortgage registration fees
  • Monthly loan fees or annual package fees for the new loan
  • Risk Fees to protect the lender, such as Lender’s Mortgage Insurance.
Check if any risk fees will apply

Check if any risk fees will apply

These types of fees usually apply where the amount borrowed is greater than 80% of the property value.
Consider the impact on your credit score

Consider the impact on your credit score

Lots of things can impact your credit score, including when a credit provider obtains a copy of your report during your credit application. Whilst each of the Australian credit reporting bodies calculate credit scores differently, making multiple applications within a short space of time can negatively affect your credit score. Find out more about credit reporting.
Borrow within your means

Make sure you're borrowing within your means

Seeing an enticing offer can make you want to borrow more than you need “just in case”, but don’t forget that variable interest rates fluctuate, and fixed interest rates have an end date – and you need to be able to afford repayments comfortably should anything happen.

 

What fees are involved with refinancing?

There may be costs involved with refinancing and switching lenders or products. Ranging from loan application fees with your new lender, to a discharge fee with your outgoing lender, an even property valuation and risk fees - refinancing isn’t as straightforward as changing your direct debit details. So before you go and refinance to save a few basis points off of your existing interest rate, make sure you read the terms of your current loans carefully (including break fees, interest rates, comparison rates etc.) and weigh these up against the features of any refinance options you’re considering, including the loan term. Learn more about what fees to expect when refinancing.

 

Do you need to pay LMI again when refinancing?

It’s possible that some people may have to pay a risk fee that their chosen lender requests, to offset the risk or otherwise protect the lender. For example, a Lenders Mortgage Insurance (LMI) fee will most likely be required where the amount you borrow is above 80% of the property’s value.

    

When can I refinance my home loan?

There is no set time of when you can refinance, however it's common to refinance your home after being in the property for a few years. This is due to a higher chance of the market naturally appreciating, interest rate movements and your financial situation and personal goals may have changed since you first secured the loan.

Can I refinance if my repayments are in arrears?

This is a conversation best had with a lender, or potentially a licensed financial or tax advisor depending on your circumstances. Not all lenders will consider applications if an applicant has fallen behind on mortgage repayments, has a poor credit score or previous bankruptcy, or defaulted on a debt.

The good news? Pepper may be able to help with refinancing even if you’re in arrears.

We're here to help.   

Refinancing a home loan doesn’t have to be complicated. You can apply online with Pepper Money in less than 20 minutes if you are an eligible customer with PAYG Income.

If you're self-employed or just prefer to speak to one of our friendly lending specialists, then submit an online enquiry or call our team on 137 377.   

    

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Information provided is factual information only and is not intended to imply any recommendation about any financial product(s) or constitute tax advice. If you require financial or tax advice you should consult a licensed financial or tax adviser.

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