If your monthly mortgage is weighing heavy on your heart, it might help to refinance your home loan.
You can do this by taking out an entirely new home loan and paying off the home loan you currently have in full – and enjoy the various benefits that come with it.
Take a look at how you can refinance a home loan below, and then you can decide whether doing so is a viable option for your situation.
Step 1: what do you want to get out of refinancing?
There are numerous reasons why refinancing a home loan is an option for many people. Here are some scenarios that make it attractive:
- refinancing could mean getting a better interest rate on the new home loan,
- to consolidate debt such as credit cards and other loans,
- useful features such as an offset account or redraw facility might not have been linked to the initial home loan,
- paying a smaller amount every month by decreasing the principal and interest repayments and extending the loan over a longer period, or
- to access the home’s equity.
Knowing why you want to refinance your home loan, and what for, is necessary to move on to step 2.
Step 2: compare different types of home loans
Choosing a home loan product that suits you and your financial situation can be difficult, especially with so many options out there.
Employing the services of a mortgage broker is beneficial because they can isolate the options relevant to you and help you work through them. All you need to do is explain what you want to get out of your home loan refinancing, and they will determine the lenders that will best suit your needs.
Mortgage brokers are specialised when it comes to home loan refinancing, and they have typically built up relationships with many lenders. This often allows them to negotiate a competitive interest rate for your new home loan.
Step 3: calculate all your home loan costs
Many people are interested in refinancing their home loans because it’s becoming too expensive for them to manage. But, refinancing a home loan costs money too. Therefore, you need to meticulously consider all costs involved in refinancing before just going ahead, because you may just find that it’s more worthwhile to stick it out and carry on with your current mortgage at the end of the day.
The two main costs that you need to determine are:
- what are the exit fees to stop your current loan? (Sometimes called a discharge or break cost)
- what are the upfront costs with your new loan? (Such as the lender’s mortgage insurance (LMI) or the mortgage registration fee)
The type of interest you choose to pay will also affect the total amount payable. You need to choose between:
- a fixed interest rate loan where the interest remains constant throughout,
- a variable interest rate where the interest fluctuates with the cash rate, or
- a split home loan that combines the two.
Take note of the benefits available when choosing an interest rate, such as a redraw facility or offset account.
There’s no harm in Googling an online refinance calculator to give you a brief idea. It won’t be 100% accurate, of course, but it’s worth knowing a benchmark of upfront costs and ongoing fees. This can help you determine whether refinancing will save you money in the long run.
Step 4: apply for your new home loan
Once you know which home loan product you want, the interest rate option, and which lender you’re applying with, you can start gathering the documents required to submit your home loan application.
Some documents that most lenders require when applying for refinancing home loans are:
- your personal identification details,
- proof of employment and relevant payslips,
- bank statements and bills showing expenses,
- proof of assets, liabilities and savings.
It’s worth noting that a lender approving a home loan refinance isn’t necessarily a quicker or easier process than applying for a new home loan. There are just as many lending criteria set by the credit provider that you’ll need to meet.
To make the approval process smoother, ensure all your documents are correct and up to date. Your mortgage broker will double-check that the paperwork meets the criteria and submit it along with your application to the lender you have chosen.
Some lenders might approve your application within a few days, while other lenders might take weeks.
Step 5: approval and settlement
Once you have signed the contract of your new home loan, the settlement occurs. Your old mortgage will be fully paid off using the new home loan.
Your mortgage broker will get both parties to sign the Discharge of Mortgage form and then submit it to close the accounts of your previous home loans.
They’ll supply you with a mortgage contract that verifies:
- what the home loan amount is, and
- the terms such as the length of the loan, the repayment type, fees, etc.
This contract must include the direct debit form that states the account which your mortgage repayments should be drawn from.
Things to consider before you refinance your home loan
In any situation, there are always some cons to consider:
- If your initial home loan was on a fixed-rate mortgage and the cash rate was to rise, you would be saving money. If you change over to a variable interest rate, you could end up paying more if this happens. Also, consider whether there is a break cost of breaking your fixed loan contract and how much it is.
- If you want to refinance your home loan with the intention of reducing your monthly principal and interest repayments, your loan term will increase. Although you’ll be paying a smaller amount monthly, the ongoing interest means you will very likely pay more money in the long run.
- If the reason why you are refinancing is to access your home’s equity, most lenders require that you’ve already paid off 20% or more than the current property value. Lenders only lend up to 80% of the property’s value.
- If you have dishonoured your home loan by missing a mortgage repayment or have any other loan discrepancies, the new lender won’t see your new home loan application as viable. They also discourage unstable employment. Keep in mind that numerous declined applications will translate on your credit score which will further make your application unattractive to lenders, so make sure you’re absolutely sure of your application before submission.
When it comes to making significant financial decisions, it’s important to take your time researching and weighing up your options.
If you are thinking about refinancing your home loan, we have identified the 5 steps that are important for the process to be smooth and successful:
- Step 1: consider why you want to refinance your home loan.
- Step 2: compare different types of home loans.
- Step 3: calculate all the costs involved in refinancing.
- Step 4: apply for a new home loan.
- Step 5: have the loan approved and settled.
Remember, refinancing your home loan to decrease your monthly mortgage repayments will increase your loan term. Paying a smaller monthly amount can be appealing in the short term, but the ongoing interest will build up in the long run. And, the process of refinancing can be very costly, too.
Therefore, it’s important to consider all angles thoroughly. The help of a mortgage broker can be valuable and help you to make an informed decision that you won’t regret.
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