Refinance home loans

Refinance your home loan

When you purchase a home you know that it's going to take you a long time to pay down the mortgage but that doesn't mean you should have the same home loan or be with the same lender for 25 years. This is where refinancing comes in.

Just like new cars and other products, banks and mortgage providers release new home loan products every year. So while you probably got a competitive deal when you first took out your home loan, chances are there is now a better deal on the market more suitable to you, or as in the case of the Australian home loan market in recent years, a whole new set of lenders to choose from (e.g. online only lenders) that weren't around when you first got your home loan.

Another key reason for considering to refinance your home loan is that your financial situation is also likely to be different now to what it was 3, 5 or 10 years ago. Just as you had a home loan to suit your financial situation then, you should have a home loan that matches your lifestyle now.

To help you work out whether refinancing is a good option for you, we've pulled together this home loan refinance FAQ to help point you in the right direction.

What are the pros of refinancing?

• Lower repayments. A lower interest rate on your home loan will mean more money for you (and less profits for the banks). Why pay a higher interest rate than you need to? You can put the savings towards your monthly fun budget or get really savvy and pump it into your new lower rate home loan and own your home even sooner.
• Added features. There are now a range of features designed to help you save money like offset accounts, extra repayments and split loan functions that come standard with many home loans. Depending on how long you’ve had your existing loan these may not have been available or had fees attached, so by refinancing your home loan you will have the chance to take advantage of more flexibility.
• Unlock equity. Home owners can use refinancing as a way to unlock some of the equity in their home to help fund things like renovations or other investments. Your home equity is the difference between your home’s value and the balance of your mortgage. So if your home is worth $500,000 and you have a $250,000 mortgage, the equity in your home is $250,000. Refinancing can allow you to access this money but refinancing for this purpose also carries risk, so it is best to speak with a financial advisor or accountant to ensure you are making an informed decision.
• Debt consolidation. If you are paying multiple high interest debt on a credit card, store card or car loan you can use refinancing to consolidate that debt into your home loan. As your home loan will have a lower rate, it will mean you will pay less interest but only if you aim to pay off the debt as fast as possible. If you make minimum repayments you could end up turning short term debt into long term debt and paying more in interest.

When shouldn’t I refinance?

The biggest reason not to switch home loans would be when the costs involved in switching outweigh the benefits. There are two key scenarios when this may be the case:

• Fixed rate home loans. If you are coming to the end of your fixed rate term and you’re looking for a new home loan, this is a good time to refinance as the revert rate of fixed rate home loans is often less competitive than a lender’s best rate. But if you are only part way through a fixed term, switching could mean that you’ll have to pay break costs and this can be very expensive. The actual break cost is hard to estimate as it depends on a number of factors including the original rate you fixed at, how much is left on the loan term and how the loan was funded by the bank or lender. To get an estimate of these costs you’d need to talk with your existing lender.
• Borrowing more than 80% of your home’s value. If your new loan is for 80% or more of your home’s value you will need to pay Lenders Mortgage Insurance (LMI), which protects the lender if you can’t meet your repayments. Unfortunately, LMI is not transferable to a new loan, so even though you paid this premium for your current home loan, if you switch you will be required to pay it again. This upfront cost could be more than the savings you’d make by switching loans.

How much can I save by refinancing?

The whole point of refinancing a home loan is saving money - right? Let's give you a quick scenario to demonstrate just how much you can save if you refinance.

Say you have a $500,000 home loan with a 5.50% interest rate, by switching to a home loan with a low 4.50% rate you could save $87,382 over 25 years. That's enough for an around the world trip for two and then some!

If you'd like to get an instant snapshot of how much money you'd save, punch your stats into our Switch & Save Calculator. Whether you're looking to switch to pay off your home loan faster or wanting to lower your repayments, answer a couple of quick questions, like your loan amount, current monthly repayment, property value and current home loan, and our comparison engine does the rest. It sorts through the hundreds of home loans in our database to show you which home loans will save you the most on interest and fees.

If you'd prefer to speak with someone about your refinancing need, Mozo's home loan experts can help. We've got a free service to help you find a better deal and we'll even do the rate negotiating on your behalf. See here for more info.

What should I look for in a refinancing loan?

Gone are the days when banks or lenders only had one type of home loan available for refinancing. Today there are hundreds of home loans to choose from and which one will be best for you, will depend on a wide variety of factors.

1. Type of home loan

When you refinance, you will have the option of choosing a home loan with a variable or fixed interest rate or a combination of the two.

Variable rate home loans are the most popular type of home loan available in Australia. The interest rate of a variable rate home loan varies (goes up or down) in line with the market. This means that your repayments can fluctuate during the term of your loan.

With a fixed rate home loan the interest rate is fixed for the term of the loan, which also means your repayments are fixed. Fixed rate home loans are generally available for terms of 1 to 5 years.

An increasingly popular choice among borrowers for refinancing is a split rate home loan which gives you the option to split the loan between a fixed and a variable interest rate. With most loans borrowers can allocate the percentage split, eg. 60% variable rate and 40% fixed but there are some loans that will only allow a set percentage split. The benefit of getting a split loan is that you can still benefit from rate cuts on the variable portion of your loan and also be partially protected if interest rates rise.

2. Loan-to-value ratio (LVR)

The loan-to-value ratio or LVR is the way that banks work out your home loan options and whether your home loan needs to be covered by Lenders Mortgage Insurance.

When refinancing, it is important to understand that the value of your property will be determined by the bank's valuation of your property, and not what you paid for it or what a real estate agent tells you your home is worth. There may be a difference between the two.

The LVR is the amount you are borrowing divided by the value of your property. For instance, if you have a $600,000 home loan and your property value is $850,000, your LVR would be 70%.

If you have an LVR of less than 80%, the good news is that your home loan choices will be a plenty as many of the most competitive rates offered by lenders are for loans with LVRs below 80%.

If you are thinking of refinancing and still have an LVR of 80% or more you will be required to pay LMI which protects the bank if you are unable to maintain your loan repayments. As we outlined in the section on “when shouldn't I refinance” if you have to pay LMI, it could negate any savings you make by switching to a lower interest rate loan.

3. Headline rate versus comparison rate

When you start comparing home loans for refinancing you'll notice that banks advertise two sets of rates. The first rate (usually the lower of the two), is the headline interest rate and this is the interest rate you will pay on the amount of money you borrow.

The second rate displayed is the comparison rate and all lenders are required to display this (we also include this rate in all of our product tables and comparisons). The comparison rate is a combination of the interest rate and upfront and ongoing fees and it is designed to help you to determine the true cost of a loan.

A word of warning though, the advertised comparison rate is based off a set loan amount of $150,000 over 25 years. If you are borrowing more or less than this, your actual comparison rate may be different to the one advertised.

4. Offset account

One of the key reasons to refinance your home loan is to save money and an offset account is one of the best ways for borrowers to reduce how much interest they pay and the time it takes to pay off their home loan.

An offset account is a transaction account that is linked to your home loan. The balance of this account is then offset against the balance of your home loan. Confused? Don't be, here's a scenario to show how it works. Let's say you have a $350,000 home loan, and you have $15,000 in your offset transaction account. Instead of paying interest on the full $350,000, you will only pay interest on $335,000.

To get the most out an offset account the key is to get as much money as you can into the account and keep it there for as long as possible. You do this by:

Having your salary deposited directly into the offset account.

Using your credit card for everyday purchases. If your credit card has interest free days you can use these to save you money. Rather than using your transaction account for everyday purchases you use your credit card. This keeps the balance in the offset transaction account as high as possible (and offsets your mortgage interest). You just need to make sure that when your credit card is due, you pay the balance off in full to avoid paying interest.

Pumping any extra savings into the offset account not a savings account as the interest you will save on your home loan will be more than the interest earned in the savings account.

Are there fees when refinancing?

Yes, so you will need to take this into account when you do the sums to make sure you have these costs covered for in your switching budget. Some of the costs you could be up for include:

• Loan termination or discharge fee. This is a fee charged when you finalise your home loan with your current bank or lender. These fees range from $0 to over $600.

• Mortgage registration fee. This is a fee that you’ll pay to transfer the title of your home loan from your old lender to your new lender. This cost varies from state to state.

• Break cost fees. If you’re on a fixed rate loan, you may have to pay break fees.

• Application fee. Your new home loan may have an application fee that you’ll need to pay upfront when you take out the new home loan. These can be anywhere from $0 up to $1000.

• Valuation fee. Some banks will charge a valuation fee for them to value your property.

• Settlement fees. This is also sometimes called a legal fee and it is a fee charged for the bank to attend settlement. Sometimes these costs are waived by the lender.

What documents will I need to refinance?

If you are taking out your new loan with a different lender to the one you are currently with you will need to have the following information:

copies of your home loan statements (3 - 6 months)

proof of your income (last 3 payslips)

list of assets

list of expenses

proof of identity

You are all set, now head to the top of the page and start comparing top refinance deals.