How to refinance your home loan to get a better interest rate
Aside from the obvious convenience, refinancing can be useful, considering one refinancing option through your own lender can waive many of the standard fees and charges for refinancing. This can also be handy for avoiding government transfer duties and discharge fees.
Once you've made the decision to refinance, whether it be with your current lender or a new lender, there are some steps you can take to ensure the process is as smooth as possible.
The refinancing must-dos
The first step of refinancing is always to do a home loan comparison. If you find interest rates which look more competitive than your current home loan rates, it is a good idea to speak to your current lender to ask for a quote for how much it will cost you to leave your current loan — as this will guide your decision as to what the costs of switching are from your current lender. The other two pieces of the puzzle are the costs of entering your new home loan and the benefits of the new loan. It is up to you to weigh up these two cost elements against the benefits of the new loan. If the benefits of the new loan outweigh the costs, then the conditions are ripe for refinancing.
Step 1: Current position
Take the time to check out exactly what your current mortgage balance is and find out what interest rate you're paying right now. You can calculate your remaining balance below with our how long to repay calculator below to see how long it’s going to take you to repay your mortgage. Check if you're paying any monthly account fees on your mortgage while you're at it. See if you can find your original mortgage documents from when you established your home loan and read through it to check for any early exit fees or discharge fees that might apply.
If you can, try to work out approximately how much your home would be worth on the market.
Write down all the figures you've found somewhere handy so you have a concrete information on where you stand when you shop around.
You can't know your current position until you've requested a copy of your credit file. Your credit file is a crucial piece of information that a lender will look at before deciding whether to approve your home loan. Once you have your credit record, take action to pay down or contest any debts to get you in shipshape condition for a home loan application. Although, if your record has worsened considerably, it may even be worth not refinancing if possible.
Input your figures into our the calculator above to see how long it's going to take you to repay your mortgage.Back to top
Step 2: Do your sums
You really do need to work out how much you want to borrow for your refinance and whether doing so makes financial sense for you after the costs involved.
Of course you'll need to borrow enough to pay out your old mortgage. If you're raising cash for renovations or consolidating other debts into your home loan, you'll need to add this to your total. You may also want any fees or charges covered in the loan amount as well.
Add up the amounts to reach a total loan figure you think you need. Then divide this number by the approximate value of your house. This will give you an LVR figure.
|Fees and Cash:||$5,000|
|Total Loan Amount:||$250,000|
|Loan Amount:||$250,000 / $350,000 = 71.42% LVR|
Step 3: Homework and research
Before you approach your lender or any other lender, it's important you do a little homework first. Think carefully about what type of mortgage you want, especially if your current home loan isn't working the way you want. You might prefer a loan with more or fewer features. You might want a cheaper variable interest rate or no annual account fees or even a fixed interest rate. You might want to link an offset account to your mortgage to minimise your interest payments.
Take a few minutes to call your current bank and ask them for a payout figure. They should provide this for you over the phone. The figure will include any accumulated interest charges, discharge fees and any other fees that may apply.
Step 4: Comparison shopping
Spend some time on finder.com.au and look for the type of mortgage you want. From our comparison tables, you'll get an idea of the types of products on the market, the types of features you can expect along with fees and interest rates. See if you can narrow down your search to a few favourable lenders.
Compare some refinancing loans today
Step 5: Decide if you're using a broker
Using a mortgage broker is a decision that is a trade-off between time and money. Brokers put in a lot of work behind the scenes and can save you time, effort and plenty of stress at a time that can push you to the limit. But they can't get you the cheapest loans on the market. If you want the cheapest home loans, you'll need to get an online home loan. Online home loans are cheaper because they don't have the additional layer of costs associated with branch networks nor the costs of paying brokers fees and trail commissions.
If you'd prefer discussing your refinance options with a broker — as opposed to the expert loan managers from an online lender — they can make the process easier for you. A broker will have access to hundreds of mortgages with more than 25 different lenders across Australia. They'll be able to show you at a glance what rates and fees apply for the loan type you want.
Compare the information you find with any research you already did during your comparison check and see if you have a preference for any lender. This will make it much easier for you to reach an informed decision.Back to top
Step 6: Paperwork
Before you actually proceed with filling in an application to refinance your home, you will need to get some paperwork in order first. All banks will require very similar things, so it pays to get this step out of the way.
You will need:
- Verification of your income (payslips, tax returns)
- Copies of the last 12 months of your mortgage statements
- Copies of the last 6 months of any other statements you want to include in the refinance
- Identification (driver's licence, passport, birth certificate, marriage certificate)
- Copy of your last council rates notice
Step 7: Application
When you're happy with your choice of lender and you have your paperwork in order, it's time to begin the application process. If you like the look of a home loan found on finder.com.au, click the 'Go to site' button to begin the application process. You can call the lender and they can help you with the application process if necessary.
If you're doing your refinance through a mortgage broker, they'll ask you for all the required documents and they'll submit the application for you.
The application forms are all quite similar with most banks. You need to fill in your name, address and contact details and any addresses you've lived at for the past three years.
You also need to fill in your employment details and employment history for at least two years. You'll be asked for your income and any expenses you currently pay. Many application forms will have a section beside the expenses columns for you to check if those payments won't continue after the refinance.
If you're refinancing your mortgage, your car loan and your credit card, you will need to fill in the information about your current repayments. However, as those payments won't continue once the refinance is complete, you can check the boxes beside them so the bank won't include those figures in calculations.
The application form will also ask you to fill out details about your current assets. This includes your home, car, savings, superannuation and even the contents of your home can count as assets here.
When you're done, sign the appropriate declarations and submit your application along with copies of all the documents you put together in a previous step.
Step 8: Valuation
Once your application has been conditionally approved, the bank will arrange for a licensed valuer to come out and appraise your home. No lender will approve a home loan without conducting their own valuation. Remember, a bank valuation might sometimes be a little more conservative than actual market value. Keep this in mind when you think about your LVR.
As long as your loan amount is within the allowable LVR compared to your home's value, your application will proceed to the next stage.Back to top
Step 9: Mortgage documents
When the valuation is complete you'll be given a formal approval. At this time, the bank will issue the mortgage contract that outlines the terms and conditions of your loan, including any fees and charges that may apply. Sign these and return them to the bank.
You may also need to sign discharge documents for your old bank at this point, if you didn't already do it at the application stage. This is a formal notification to your old bank that you're refinancing over to a new bank and you want them to discharge the mortgage over your property's title.Back to top
Step 10: Certificate of currency
Before you send back your signed mortgage documents, take the time to call your current home building insurer. Ask them to change the name of the interested party over to the name of your new bank. They'll know what you mean.
Then ask them to fax you a copy of the amended Certificate of Currency. Again, they'll know what you mean when you ask for this. Make a copy and keep one for yourself.
Place the other copy of the Certificate of Currency in with your mortgage documents and return these to your bank.Back to top
Step 11: Settlement day
Settlement day is the day your new home loan gets drawn down. This means the funds from your new mortgage are used to pay off your old home loan and close that account. If you're refinancing other debts as part of the loan, those will be cleared and closed as well. If you included an amount of cash, this will be made available to you in your account.
At the same time, your new bank takes over ownership of your property title and registers their interest on it as part of settlement proceedings.
This is the day your old mortgage repayments stop. Your new mortgage begins on settlement day and your first repayment is due one month from that date, unless you've arranged for fortnightly payments, in which case they'll start 14 days after settlement date.Back to top