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Switching is easier than you think. You just need to compare, find a better home loan and then apply for it like any other mortgage. Here are the steps involved in refinancing your home loan:
Check your interest rate. Look at competitive mortgage rates and see if yours is too high.
Speak to your current lender and ask for a lower rate. It never hurts to ask for a lower rate and if your lender agrees then you can save yourself the hassle of refinancing.
Compare home loan options. If you do decide to switch lenders, look for a loan with a better rate and features you need. Make sure it's a loan type that matches your situation.
Crunch the numbers. Examine the costs of your new loan, including application and ongoing fees and make sure the new loan really is a better deal. Check your exit costs from your current loan too (there may be a discharge fee or break costs).
Apply for the new home loan. Collect your mortgage documents, submit your application and then wait for approval from the new lender.
Exit your current loan. Notify your current lender and discharge your mortgage. Your new and current lender will take care of the rest.
And that's the basic refinancing process. To give you more help, this page contains a list of all the documents you'll need to submit a home loan application. And if you want expert refinancing guidance, you can also speak to a mortgage broker.
Refinancing to a lower interest rate will lower your monthly mortgage repayments. And even a small decrease in monthly repayments can add up to thousands of dollars over the length of a 30-year mortgage.
Here's an example using a $400,000 mortgage with a 30-year loan term. In this scenario, the borrower has a rate of 3.30% and then refinances to a 2.80% rate 2 years into their mortgage.
Rather than switch to a new 30-year term the borrower chooses a 28-year term. They've repaid only a small amount of their loan in 2 years, so the new mortgage loan amount is $383,851.
Savings (28 years)
The point at which you refinance affects your savings. If you refinance after 10 years in the example above you'd save less than if you refinanced after 2 years. With mortgages, time is money.
However, the trick to really making your refinance count is to switch to a lower rate and keep your repayments the same. This way, you're basically making extra repayments every month. You're paying the same as before but it's paying off your principal faster. Use our extra repayments calculator to see how much you can save.
If your new loan has an offset account you can simply save the extra money there. In this way it functions just like an extra repayment.
But there are more benefits to refinancing than just saving money.
Get more mortgage features. Borrowers may switch to a mortgage because it has features like additional repayments, a redraw facility, portability or offset accounts. These features can help you save on interest repayments or give you more flexibility.
Unlock your equity. If you've repaid a substantial amount of your mortgage then this is equity. You can borrow this equity using a line of credit or by refinancing and borrowing more money.
Consolidate debt. You can refinance multiple debts into your mortgage and pay it off with a single interest rate. This can help because a home loan rate is lower than a car or personal loan rate. However, paying off a smaller debt over decades by adding it to your mortgage can end up costing you more in interest over time.
How much will it cost to refinance my home loan?
There are costs involved with refinancing your loan, including lender fees and government charges.
Valuation fees. Your new lender will value your property during the application and may charge a fee for it.
Discharge fees. Lenders often charge a fee to end a home loan, whether by refinancing or paying the loan off.
Fixed rate break costs. If your current home loan has a fixed interest rate then you can face higher costs for breaking the loan. Read our guide on fixed loan break costs for more information. If this cost is too high you should wait until the fixed period ends before refinancing.
Government fees. Refinancers may have to pay two state government fees, one to discharge their old loan and one to register the new one.
Are there situations where I shouldn't refinance?
There definitely are cases where refinancing will cost you more. Here are some common ones:
Your fixed rate break costs are too high
If the cost of breaking a fixed rate loan is too high then refinancing isn't worth it. Check with your current lender for a better idea of your break costs (it's hard to calculate on your own).
Your equity is below 20% of the property's value
If you don't own much of the property then you'll have a harder time refinancing. If you need to borrow more than 80% of the property's value you will have to pay lenders mortgage insurance (even if you paid it on the first home loan). This can be a big cost and makes refinancing pointless.
Your loan amount is small or you're selling soon
If your loan amount is relatively minimal then the savings from refinancing aren't worth the hassle. And if you're selling soon you won't benefit from the savings much either.
Richard Whitten is Finder's senior home loans writer. He helps Australians understand the ins and outs of mortgages so they can find lower rates and make smarter property decisions. Richard trained as a high school English teacher at the University of Sydney, but found that mortgage management was more rewarding than classroom management. Before working at Finder he lived in Seoul, where he edited textbooks and ran communication courses for Korean corporations.
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